Audit Quality and Family Ownership: The Mediating Effect of Boards’ Gender Diversity

Abstract

This paper investigates the critical role of female directors on the boards of Saudi-listed companies and how they influence the relationship between the demand for higher audit quality and family ownership. The results indicate that female directors fully mediate the relationship between audit quality and family ownership. This suggests that the involvement of female directors on boards may enhance the demand for higher audit quality in family-owned firms. These findings corroborate both agency theory, family business, and stakeholder theoretical background. From a practical standpoint, this study offers valuable insights for investors, policymakers, and regulators. It underscores the importance of increasing female representation on the boards of Saudi family-owned firms to promote effective governance and improve organizational transparency.

1. Introduction

Recently, serious initiatives have been undertaken to promote gender diversity in boardrooms worldwide. However, significant disparities persist between developed and developing countries in this regard, notably within the GCC region. Saudi Arabia, in particular, has seen a remarkable 40% rise in female workforce participation by 2023, in line with its 2030 vision1. Academically, scholars have explored corporate governance structures and their effectiveness, particularly through the lens of gender diversity on boards. As an external corporate governance tool, audit quality has received much interest in the literature, both in developed and developing economies (DeFond & Zhang, 2014; Zehri & Zgarni, 2020). Drawing from several theories, specifically agency and institutional theories, Habib et al. (2019) provided an overview of determinants of auditor choice and underlined the complexity of this decision in the boards. From an empirical perspective, many scholars have analyzed the direct association between ownership structure and audit quality demand (Hope et al., 2013; Darmadi, 2016). However, to the best of our knowledge, no previous study has examined the indirect relationship between the demand for high audit quality and family ownership. Previous studies suggested that firms’ ownership structures might influence gender diversity on the board which, in turn, might enhance the demand for high audit quality (Ararat et al., 2010; Pious et al., 2022). Our paper explores the indirect link between audit quality and family ownership by focusing on Saudi Arabia’s environment. Precisely, we analyze the mediating influence of board gender diversity (GDBO) on the relation between audit quality demand and family ownership (FAMOWN) within non-financial companies listed in the Saudi stock market “Tadawul”. Our paper comprises three main focuses: (1) the direct relation between auditor choice and FAMOWN, (2) the effect of FAMOWN on GDBO, and (3) the mediating role of GDBO in shaping the link between audit quality and FAMOWN.

The selection of GDBO as a mediator in the relationship between audit quality demand and FAMOWN is supported by two main justifications. Firstly, the inconclusive findings from the prior literature regarding the direct impact of ownership structure, particularly family ownership, on auditor choice might dissimulate a potential indirect association between these variables (Ho & Kang, 2013; Ghosh & Tang, 2015). Secondly, empirical research indicates that female directors bring inherent advantages to firms by mitigating risk management, promoting better performance, and enhancing transparency (Kabir et al., 2023). Our paper addresses a research gap by focusing on the Saudi context, which suffers from a lack of research on this topic, and it contributes to the existing literature by highlighting the mediating role of gender diversity, an area that has received limited attention in the academic community despite extensive global research on audit quality and ownership structure (Mitra et al., 2007).

Internally, the ownership structure and the board of directors are considered the most important factors in explaining the efficiency of corporate governance within a firm (Tawfik et al., 2022). Externally, audit quality has gained significant attention from scholars, especially after the Enron scandal (Bilal & Komal, 2018). This research primarily focuses on explaining the demand for high audit quality with family ownership in the Saudi context. In the past ten years, Saudi Arabia has lived through several socioeconomic changes and has built a strategic plan based on the non-oil economy. In this new atmosphere, we estimate that it is relevant to explore the effect of family ownership on audit quality demand through boardroom diversity. While studies on the demand for high audit quality and corporate governance are abundant in developed countries, this topic is still limitedly explored in emerging economies, particularly in Saudi Arabia. This fact, along with the new socioeconomic landscape in the country, explains the selection of Saudi Arabia as a case study to analyze the demand for high audit quality regarding family ownership and boardroom diversity. Moreover, inconsistent findings from the previous literature concerning the effect of family ownership on audit quality demand suggest that further and deeper exploration of this field of research is needed (Odudu et al., 2019).

Using Structural Equation Modeling (SEM), our paper analyzes a dataset consisting of 201 firms listed in “Tadawul” from 2017 to 2023. The findings show that gender diversity in the board exerts high-level mediation on the relationship between auditor choice and family ownership in Saudi Arabia irrespective of the audit quality measure used (auditor brand name or audit fees). Relying on agency theory, stakeholders, and institutional theoretical framework, our paper underscores the complex interplay among FAMOWN, GDBO, and audit quality demand in the Saudi economic context. The findings confirm that family-owned firms exhibit a higher demand for audit quality services when women participate on the board, supporting the guidelines of agency theory in promoting financial transparency and mitigating interest conflicts. Moreover, the positive relationship between family ownership and GDBO underscores the strategic importance of gender diversity in promoting a firm’s corporate governance, following the tenets of stakeholder theory. Additionally, the mediating influence of GDBO on the link between family ownership and audit quality highlights the significant impact of women’s positions in top management teams on organizational outcomes, as posited by institutional theory. These insights emphasize the critical role of GDBO in fostering effective governance mechanisms and subsequently for protecting the interests of non-family shareholders in Saudi companies.

Our research findings could serve as a valuable guide for the Saudi government in reinforcing the contribution of women to enhance financial transparency by curbing potential family managers’ opportunism. Moreover, having gender diversity on the board should contribute to the effectiveness of its oversight mission and, in turn, boost overall firm performance. Thus, prioritizing initiatives to increase female representation on corporate boards should be considered a strategic imperative to strengthen governance practices mainly in family-owned firms.

The rest of this paper is organized as follows: Section 2 discusses the theoretical background. Section 3 describes the pertinent literature and presents the formulation of the hypotheses. The methodological aspects related to the paper are explained in Section 4. Section 5 showcases the descriptive statistics, the main findings, and discusses the additional tests conducted to validate the results. Finally, we conclude the study with Section 6.

2. Theoretical Background: Agency Theory, Family Business Theory, Institutional Theory, and Stakeholder Theory

De Angelo (1981) defines audit quality as the auditor’s ability to detect fraud and irregularities in financial statements (auditor skills) and, simultaneously, the capacity to reveal such findings impartially in the audit report (auditor independence). This definition has been widely used in the literature on audit quality (DeFond & Zhang, 2014; Khan et al., 2016). As we aim to investigate the demand for audit quality, we first assume that auditors’ services differ from one audit firm to another.

Agency theory highlights the inherent conflict of interests within the agency relationship, stemming from the separation between ownership of capital and managerial responsibilities. Key characteristics of this relationship include information asymmetry and moral hazard. To address these conflicts, it is necessary to implement mechanisms regulating the actions of all parties involved in companies. Shareholders often require mechanisms to monitor organizational accountability. In this regard, audit quality can take on a relevant role in reducing agency costs by overseeing managerial actions (Zgarni et al., 2016; Kamel & Emad, 2017). Most studies addressing audit quality often consider corporate ownership structures (such as ownership concentration, minority shareholders, and the role of domestic and foreign investors, as well as family versus non-family ownership) as indicators of agency problems. In this perspective, family business theory highlights that owners frequently confront the challenge of balancing the interests of the business system with the conflicting goals of the family system. Tensions may arise when the goals or interests of one system conflict with those of another. High-quality audit services could contribute to a well-aligned system and assist family-owned companies in ensuring the continuity of their business.

Besides agency theory and family business theory, the choice of audit quality has been deeply analyzed through the lens of the institutional and stakeholder theories. As Scott (2008) describes, the institutional theory is “a widely accepted theoretical posture that emphasizes productivity, ethics, and legitimacy”. From this perspective, scholars highlight that a key aspect of institutional theory is its focus on ethics and firm country values rather than simply optimizing decisions and structures. This theory provides a broader viewpoint on the need for audit quality by addressing not only shareholders’ interests, as agency theory does, but also those of various users such as creditors, suppliers, and others (Fossung et al., 2020). The primary goal of audit quality within this framework is to protect the interests of a wide range of stakeholders involved with public companies.

3. Literature Review and Hypotheses

Firstly, this paper examines the impact of family ownership on the demand for audit quality in the Saudi context. Secondly, we investigate the relationship between family ownership and board gender diversity. Finally, we aim to assess the mediating role of gender diversity in the board on the association between family ownership and audit quality.

3.1. Audit Quality and Family Ownership

Ownership structure refers to the distribution of rights and duties among several types of shareholders within a company. It may involve different categories of shareholders, such as family members, institutional investors, the government, royal investors, foreign investors, and concentrated ownership groups. According to the previous literature, it has been demonstrated that each type of ownership differently affects the demand for audit quality based on shareholders’ needs and risk levels. In this paper, we focus on the effect of family ownership given the wide spread of this type of shareholders in Saudi companies.

In the light of the literature, we detect two contradictory opinions concerning the influence of family ownership on audit quality demand. Referring to agency theory, it is assumed that interest conflicts should be limited in family-owned firms because family directors simultaneously assume the two functions: management and ownership. Since family directors have a tight oversight of their capital actions, there is a lower demand for audit quality in family-owned firms. Subsequently, relying on the benefit–cost trade-off, some scholars have found a limited need for high audit quality in family-owned firms (Ben Ali & Lesage, 2014; Nelson & Mohamed-Rusdi, 2015; Odudu et al., 2019). Many authors have conducted comparative analyses between family-owned and non-family-owned businesses regarding their audit scope (Ho & Kang, 2013; Abudy et al., 2024). It was established in these previous studies that family-owned firms incur lower audit fees than their non-family-owned counterparts. This difference aligns with agency theory, where auditors tend to reduce the scope of audits in family-owned firms as they perceive these firms to be associated with a lower audit risk. Moreover, family owners may potentially look for short-term profitability rather than aiming to achieve long-term goals (Charbel et al., 2013). Therefore, they are not willing to pay high auditing fees. Fasoulas et al. (2024) found that family-owned firms are reluctant to select high auditor quality within Greece-listed firms.

However, a second streamline of research suggests that agency conflicts exist even in family-owned firms. Niskanen et al. (2010) and Azoury and Bouri (2015) demonstrated that family-owned companies, similar to non-family-owned ones, require high-quality audit services to reassure stakeholders and ensure business continuity. Family directors, who often hold senior positions, may exhibit opportunistic behavior, taking advantage of their position at the expense of other shareholders’ interests. To signal their integrity, family-owned firms prefer to hire a higher-quality auditor rather than recruiting independent directors on the board.

Al-Ghamdi and Rhodes (2015) showed that in the Kingdom of Saudi Arabia (KSA), the effect of family ownership on firm performance was insignificant. In the same Saudi environment, Al-Faryan and Dockery (2021) demonstrated that family ownership deteriorates firm performance. Conducting a comparative analysis between Saudi and Egyptian firms, Al Sharawi (2022) found a significant positive influence of family ownership on audit quality demand. A similar conclusion was found by Alrawashdeh (2021) using a survey sent to 400 Saudi auditors. In the Omani context, Sanad and Al Lawati (2023) established that family directors moderate the relationship between ownership structure and audit quality.

The mixed findings regarding the influence of family ownership on audit quality demand could be due to a clustering bias of ownership structure. Thus, there should be a distinctive influence between family shareholders and family managers’ shareholders on audit quality demand. In this vein, Odudu et al. (2019) classified family ownership as a family-owned business managed by the family; a family-owned business with external ownership, where the majority of the ownership is with the family; or a family-owned business managed by external staff. Such family ownership typology could provide a better analysis of the effect of family ownership on audit quality demand. Another possible explanation for inconclusive research findings is the ignorance of the potential interaction between family ownership taken individually or jointly with other types of ownership (such as foreign or institutional ownership), as stated by Lee et al. (2018) and Al-Abdullah and Al Ani (2021). Considering other stakeholders when analyzing the demand for audit quality corroborates the proposals of the institutional and stakeholder theories, which suggest that firm performance cannot be enhanced without prioritizing the interests of various stakeholders and business partners (Guizani & Abdalkrim, 2021).

In light of prior studies, we suggest testing the following hypothesis:

H1. 

There is a negative association between family ownership and audit quality demand in Saudi-listed companies.

3.2. Family Ownership and Board Gender Diversity

The board of directors constitutes a centerpiece in corporate governance talk and has received great attention in the financial accounting literature. From the agency theory perspective, the board of directors contributes to the enhancement of firm performance by constraining managerial opportunism and reducing conflicting interests between principal and agent (Dechow et al., 2010). However, the efficiency of the board’s monitoring role and its contribution to the firm’s corporate governance depends on several features underlined by scholars. One such factor is gender diversity in the boardroom.

Abbasi et al. (2020) asserted that firms with female directors and female accounting experts serving on the audit committee exhibit greater oversight of their financial reporting processes. Similarly, Zalata et al. (2017) found that the participation of female experts in top management positions is related to a significant decrease in earnings management, indicating more reliability of financial disclosure. Concerning the association between family ownership and female participation in the boardroom, the literature provides mixed results. Saeed et al. (2017) conducted an empirical analysis using data from two emerging economies, India and China. The authors found a statistically significant negative relationship between family ownership and board gender diversity. However, they noted that this relationship becomes positive when family-owned firms engage in international trade.

Mustapha and Ahmad (2011) established a negative influence of gender diversity in family-owned companies upon dividend announcement using a sample of Asian emerging countries. García-Meca et al. (2022) found different results between family-owned and non-family-owned companies when testing the effect of board gender diversity on Spanish firms’ performance. The findings show that women on the board are more effective in enhancing firm performance in non-family-owned companies compared to their counterparts in family-owned firms. This finding could be due to the fact that family ties might negatively affect the effectiveness of the female monitoring role and creativity in the boardroom. Moreover, the appointment of women in high management positions in family-owned firms is generally based on family ties rather than women’s skills and expertise. Women in family-owned firms encounter significant obstacles from their parents and suffer from a small margin of power contrary to female managers in non-family companies (Clark, 2000). This issue is particularly pronounced in male-dominated societies where roles and responsibilities are divided by gender. It is often argued that women in family-owned companies prioritize the family’s needs over their careers and tend to support male senior managers (Ramachandran & Bhatnagar, 2013). However, in non-family companies, female directors are typically hired based on their diligence and knowledge, allowing them to leverage their independence to enhance the company’s performance (Filser et al., 2018).

Another line of research shows a positive association between family ownership and gender diversity on the board. Despite the limited conflicts of interest in family-owned firms, it has been contented by some researchers that senior managers prefer hiring women in their board rather than nominating independent male directors as one corporate governance form. By appointing female directors, family-owned firms can signal their commitment to integrity and ultimately reassure other stakeholders, particularly minority shareholders (Niskanen et al., 2010; Azoury & Bouri, 2015).

In this study, we suggest testing the following hypothesis:

H2. 

There is a positive association between family ownership and board gender diversity in Saudi-listed companies.

3.3. The Mediating Role of Board Gender Diversity

This study aims to explore whether family-owned firms listed in Saudi Arabia experience a lower demand for audit quality. Thus, we first posit that family-owned firms influence gender diversity on their boards. The existing literature suggests that women tend to be more conservative, ethical, and vigilant regarding fraud compared to male managers (Abbasi et al., 2020; Alves, 2023). Subsequently, we anticipate that this heightened board gender diversity should be translated to a greater demand for audit quality.

Ararat et al. (2010) showed that female directors are more likely to engage Big Four auditors to improve the quality of financial reports and to safeguard their reputational capital. Other researchers suggested that female directors have a better understanding of the differences between audit services provided by Big Four vs. non-Big Four auditors, which strengthens the client’s internal control systems This might increase the efficiency of accounting information systems. Lai et al. (2017) demonstrated that boards with greater gender diversity were more likely to hire industry-specialist auditors compared to less diversified boards. In this study, we suppose that female directors increase the likelihood of clients hiring high-quality auditors. From the previous assertions and given the link between family ownership and board gender diversity, we postulate that family ownership may indirectly influence audit quality demand via its effect on GDBO.

Given the mixed findings in the literature regarding the direct influence of family ownership on audit quality demand, we posit that Board gender diversity could play a mediating role in shaping the relationship between family ownership and audit quality demand. Therefore, we hypothesize the following:

H3. 

GDBO mediates the relationship between audit quality and family ownership in Saudi-listed companies.

4. Methodology

4.1. Data Collection

The final sample used to test the research’s hypotheses related to the intriguing link between family ownership, board gender diversity, and audit quality included 201 Saudi-listed companies from 2017 to 2023. Initially, our analysis included all publicly listed firms in “Tadawul”, resulting in a dataset comprising 330 companies. Due to their specific accounting regulations, financial companies were excluded from our sample, decreasing the number of observations to 2135 over the seven-year period. Subsequently, companies with incomplete data were removed, which led to a final sample of 201 companies, totaling 1407 observations, as illustrated in

Table 1. Sample selection process and sample partition across sectors.

Panel A: Sample Selection Process
Description	No. of companies	No. of obs.
Total number of observations	330	2310
Less, financial companies/observations	(25)	(175)
Remaining number of observations	305	2135
Less, missing observations	(104)	(728)
Final sample	201	1407
Panel B: Sample According to Sectors
Industries	No. of companies	Percentage
Customer services	29	14%
Material	19	9%
Industrials	72	36%
Health care	26	13%
Foods and beverages	10	5%
Energy	13	7%
Media	12	6%
Real estate	20	10%
Total	210	100%

, Panel A.

Panel B of Table 1 displays the percentage distribution of companies according to principal sectors in the KSA financial market. The data for our sample were gathered from two different sources: the Refinitiv Thomson Reuters Database and the Argam database (www.argam.com, accessed on 1 March 2024).

4.2. Regressions and Variables

Table 2. Summary of variables and their measurements.

Dependent variable: audit quality	Code	Variables	Definition	Authors
	AUDREP AUDFEES (This variable is used in the robustness check analysis)	Auditor reputation Audit fees	Dummy variable: 1 if auditor is part of Big 4, 0 otherwise Natural logarithm of audit fees	Zehri and Zgarni (2020) Al Sharawi (2022)
Independent variables	FAMOWN	Family ownership	Percentage of shares held by family members	Guizani and Abdalkrim (2021)
Meditator and independent variable	GDBO	Board gender diversity	Percentage of female directors serving on company’s board	Aladwey and Diab (2023)
Control variables	INDBO	Independence of board	Percentage of non-executive board members to total board members	Zehri and Zgarni (2020)
	SIZEBO	Size of board	Total number of board members	Pious et al. (2022)
	FS	Firm size	Algorithm of total assets	Al-Abdullah and Al Ani (2021)
	FP	Firm profitability	Ratio of annual net profit before tax by average total assets	Al-Musali et al. (2019)

defines the variables included in our analysis. The dependent variable reflects audit quality demand. In regressions (1) and (3), audit quality is represented by the variable AUDREP shown through a binary measure (1 if the auditor is a part of the Big Four, and 0 otherwise), whereas in the robustness check analysis, we use the variable AUDFEES as an alternative measure for audit quality. The data for the two previous measures were derived from the Argam Database.

The independent variables are related to family ownership (FAMOWN) and board gender diversity (GDBO). Four control variables related to board- and firm-specific attributes are incorporated in the analysis: the independence of the board (INDBO), the size of the board (SIZEBO), the firm size (FS), and firm profitability (FP). Detailed definitions and measurements of the variables are displayed in Table 2 and will be used in the following regressions which constitute the three paths required to implement SEM analysis:

$$\begin{gathered} {AUDREPUT}_{it}={\alpha }_0+{\alpha }_1{FAMOWN}_{it}+{\alpha }_{2}INDBOit+{\alpha }_{3}SIZEBOit+{\alpha }_{4}FSit+{\alpha }_5{FP}_{\mathrm{it}} \\ +{\epsilon }_{1,jt} \end{gathered}$$

(1)

$$\begin{gathered} {GDBO}_{it}={\alpha }_0+{\alpha }_1{FAMOWN}_{it}+{\alpha }_{2}INDBOit+{\alpha }_{3}SIZEBOit+{\alpha }_{4}FSit+{\alpha }_5{FP}_{\mathrm{it}} \\ +{\epsilon }_{2,jt} \end{gathered}$$

(2)

$$\begin{gathered} {AUDREPUT}_{it}={\alpha }_0+{\alpha }_1{FAMOWN}_{it}+{\alpha }_{2}GDBOit+{\alpha }_{3}INDBOit+{\alpha }_{4}SIZEBOit+ \\ {\alpha }_{5}FSit+{\alpha }_6{FP}_{\mathrm{it}}+{\epsilon }_{3,jt} \end{gathered}$$

(3)

where i and t denote the individual effect and the time period, respectively; ${\alpha }_0$ is the fixed effect; and ${\epsilon }_{j,it}$ is the error term for $j=\left[\mathrm{1,2},3\right]$.

4.3. Structural Equation Model (SEM)

To detect a potential mediating role of gender diversity in shaping the association between audit quality (AUDREP) and FAMOWN, we follow Baron and Kenny’s (1986) mediation approach, based on a structured three-step procedure. Thus, we proceed as follows: Step 1 evaluates the effect of FAMOWN on the dependent variable (AUDREP) in the main regression (1). Step 2 and step 3 constitute the mediation process, where step 2 assesses the influence of the independent variable (FAMOWN) on the mediator variable (GDBO), and the final step (3) illustrates how the mediator (GDBO) influences the direct relationship between FAMOWN and AUDREP.

According to Guizani and Abdalkrim (2021), the full mediation effect requires, firstly, that the independent variable significantly affects the mediator (path a, Figure 1). Second, the dependent variable should explain variations in the mediator (path b, Figure 1). Finally, after checking for the relations in both paths a and b, the first significant relationship between the independent and dependent variables (path c1) should become insignificant (path c2).

5. Analysis and Results

5.1. Descriptive Analysis

The main descriptive statistics of all the variables for the whole sample are displayed in

Table 3. Descriptive statistics for all variables.

	Panel A. A Summary of Descriptive Statistics for the Whole Sample (1407 Observations)
Variables	Mean	Std. dev.	Min	Max
AUDREP	0.35	0.18	0	1
AUDFEES	6.5	2.1	2.3	11.1
FAMOWN	0.52	2.49	0	0.82
GDBO	0.29	14.71	0	0.39
INDBO	0.41	11.2	0.23	0.6
SIZEBO	6.1	0.31	4	12
FS	8.16	1.83	3.30	13.13
FP	0.9	5.34	−0.85	1.68
Variables	Panel B. Descriptive statistics according to family-owned vs. non-family-owned firms
	Family-owned firms (777 observations)	Non-family-owned firms (630 observations)	Mean difference	t-statistic
	Mean	Mean
AUDREP	0.25	0.76	0.499	−3.484 **
AUDFEES	4.14	7.82	−3.678	1.254 *
GDBO	0.16	0.35	−0.189	6.267 ***
INDBO	0.62	0.53	0.089	4.886 **
SIZEBO	7.67	6.23	1.445	2.179
FS	6.34	5.98	0.358	2.356
FP	0.98	0.67	0.31	5.283 *

*** p < 0.01, ** p < 0.05, and * p < 0.1.

, panel A. The findings show that less than half of the companies hire a Big Four auditor (a mean of 35% for the AUDREP) Whereas, the second measure of audit quality, AUDFEES, spans from a minimum value of 2.3 to a maximum of 11.1. Family ownership (FAMOWN) shows a mean of 52% and a maximum of 82%, indicating the predominance of this type of ownership in the Saudi context. When dividing our sample into family and non-family-owned firms, we notice in panel B of Table 3 that there is a significant difference in the means of the two measures of audit quality (AUDREP and AUDFEES) (−0.499 and −3.678, respectively). These statistics indicate that the demand for audit quality is more pronounced in non-family-owned companies than in family-owned businesses. The average proportion of female participation in the board (GDBO) across the sampled firms is approximately 30% of the total board members, with a high standard deviation (14.71). This percentage highlights the poor participation of women on the boards of Saudi companies. Moreover, we record that family-owned companies are significantly less gender-diversified compared to non-family-owned companies, as shown in Table 3, panel B (the means of GDBO are 16% and 35%, respectively). Our findings regarding female representation on the board of Saudi companies are consistent with Alshareef (2024). Despite the encouragement provided by the 2030 vision to enhance board gender diversity, Saudi boards are still male-dominated. The number of directors on the board ranges from 4 to 12, which seems to be consistent with the 2017 Saudi Corporate Governance Code recommendations. Similarly, most companies in the sample show a great proportion of independent directors on their boards, achieving a maximum of 60%.

5.2. Correlation Analysis

The main findings regarding the correlation between continuous variables are displayed in

Table 4. Pearson correlation matrix and VIF statistics.

	Panel A: Pearson Correlation Matrix						Panel B: VIF Statistics
Variables	(1)	(2)	(3)	(4)	(5)	(6)	VIF	1/VIF
(1) FAMOWN	1						1.75	0.57
(2) GDBO	−0.023	1					1.06	0.94
	(0.9)
(3) INDBO	−0.065 ***	0.032 ***	1				1.45	0.68
	(0.000)	(0.000)
(4) SIZEBO	−0.011 *	0.026	−0.021 **	1			1.23	0.81
	(0.056)	(0.216)	(0.01)
(5) FS	0.143 **	0.102	0.235 *	−0.09	1		1.03	0.97
	(0.01)	(0.133)	(0.063)	(0.7)
(6) FP	0.206 **	−0.042	0.235	0.65 *	0.96 ***	1.00	1.37	0.72
-	(0.04)	(0.23)	(0.13)	(0.09)	(0.000)
							1.31

*** p < 0.01, ** p < 0.05, and * p < 0.1.

. To avoid any serious problem of multicollinearity, correlation coefficients must remain below 0.8 (Gujarati & Porter, 2010). In light of Panel (A) in Table 4, there is no evidence of multicollinearity issues within the dataset. Additionally, we conduct a VIF analysis, which requires Variance Inflation Factor (VIF) values to stay below 10. Panel B of Table 4 presents VIF statistics consistently below this threshold, affirming the absence of multicollinearity issues.

5.3. Discussion

Table 5. SEM results for audit reputation.

	Model 1 (AUDREP)		Model 2 (GDBO)		Model 3 (AUDREP)
	Coef	p-Value	Coef	p-Value	Coef	p-Value
FAMOWN	−12.14 **	0.013	1.34 *	0.06	−1.288	0.248
INDBO	10.86	0.149	23.59 *	0.078	70.341	0.612
SIZEBO	2.86 *	0.03	9.386	0.134	−42.309	0.573
FS	0.46 *	0.09	0.326 ***	0.000	5.891 ***	0.001
FP	3.7	0.403	0.634	0.30	4.33 **	0.012
GDBO					12.57 **	0.045
Constant	−35.89	0.624	−4.65 ***	0.000	−17.31	0.935
R-Squared	0.352		0.267		0.396
Firm-Year Effect	Yes
Hausman Test	34.64	0.000	74.06	0.000	39.74	0.000
No of Obs.	1407

*** p < 0.01, ** p < 0.05, and * p < 0.1.

elucidates the main findings issued from the SEM analysis. The results of the Hausman tests yielded statistical significance at a 1 percent threshold, showing the preference for the fixed effect model over the random effect model in our analysis.

Model 1 in Table 5 illustrates the first step of an SEM analysis, which aims to demonstrate the existence of a statistically negative relationship between FAMOWN and AUDREP. The results indicate that FAMOWN has a significant negative effect on Big Four auditor choice. According to Table 5, ${\alpha }_1$ = −12.14 with a p-value of 0.013 (Model 1), validating H₁. This finding fully aligns with the agency theory proposals underlying the limited extent of conflicts of interest in family-owned firms given that directors are themselves owners and belong to the same family. In such a situation, it would not be beneficial for shareholders to spend significant funds on hiring a well-known auditor.

Our finding corroborates those of Odudu et al. (2019) and Abdu Alkhazaleh et al. (2024) but are contradictory to those established by Al Sharawi (2022). The negative effect of family ownership on audit quality demand could be explained by contextual and cultural factors related to the Saudi context, as highlighted in an institutional theoretical framework. When family ownership is prevalent in a firm, we should expect the decision-making process to become centralized within the family, especially if other types of ownership, such as foreign or institutional investors, are limited or nonexistent. A high audit quality might be perceived as a threat to the family director’s autonomy and could expose them to greater scrutiny from outsiders. In Saudi Arabia, cultural values such as trust, familial relationships, and friendships hold great importance in social life and often influence managerial decisions. Subsequently, in family-owned firms, a preference for auditors who are personally trusted over those with a high reputation might be expected. However, from the perspective of stakeholder theory, it becomes interesting to consider the influence of other firm partners. These include foreign, institutional, and, notably, royal investors in Saudi Arabia, alongside family owners (Tawfik et al., 2022).

Regarding the control variables in Model 1 in Table 5, there is a non-significant relationship between INDBO and AUDREP in Saudi-listed companies (${\alpha }_2$ = 10.86; p-value = 0.149). This finding could be due to the reticence of family board members to recruit independent outsiders as directors, as highlighted by Guizani and Abdalkrim (2021) in GCC countries and Abdu Alkhazaleh et al. (2024) in the KSA. Moreover, when recruiting independent directors on their boards, family-owned firms might no longer need high audit quality services as they are substituted by another oversight tool represented by the independent directors. Both the SIZEBO and FS have a significant positive influence on audit quality demand (with, respectively, ${\alpha }_3$ = 2.86 and p-value = 0.03 and ${\alpha }_4$ = 0.46 and p-value = 0.09). This result can be explained by the significant complexity of mitigating agency conflicts in larger firms, as illustrated by agency theory. Despite the presence of diversified corporate governance measures in large companies, there remains a potential need for high audit quality. In terms of firm profitability (FP), there is no significant relationship with audit quality demand (${\alpha }_5$ = 3.7; p-value = 0.403). This result implies that even the most successful companies do not necessarily hire a Big Four auditor, once again proving the complexity of the decision of audit quality selection (Zehri et al., 2023).

Step 2 is to show a significant relationship between the independent variable and the mediator. Model 2 in Table 5 demonstrates a significant positive effect of FAMOWN on GDBO, with an ${\alpha }_1$ value of 1.34 and a p-value of 0.06, thereby confirming the second hypothesis (H₂). This finding suggests that family-owned firms are more likely to appoint female members to their boards. From the perspective of institutional theory, this could be explained by the cultural values shared among family members, where the recruitment of women to the board is driven by inheritance practices or family strategy, thereby enhancing gender diversity (Martinez Jimenez, 2009). This aligns with the context of a Muslim country, such as Saudi Arabia, where religion plays a significant role in both daily life and business practices. Sharia, the principal source of Islamic law, mandates the transmission of inheritance to both male and female family members. As emphasized earlier, female directors on the boards of family-owned firms are often family members. In light of stakeholder theory, boardroom gender diversity is expected to improve financial transparency in the eyes of stakeholders, as female directors are often recognized for their ethical behavior (Zalata et al., 2017). This insight is especially pronounced in firms with high levels of family ownership as they seek to ensure the continuity of their business by satisfying other stakeholders. Moreover, the agency theory highlights that well-functioning governance mechanisms, such as gender diversity within the board, play a relevant role in improving firms’ oversight and monitoring. Our findings are consistent with this framework, supporting the idea that GDBO—through greater female representation—in family-owned firms should strengthen the structure of firms’ corporate governance (Carter et al., 2003; Abbasi et al., 2020). Many scholars argue that firms with high levels of family ownership suffer from a weak corporate governance structure and have a need to improve their social climate (Huse, 2007; Alves, 2023). In this perspective, women’s participation in the boardroom could bring a better social atmosphere in family-owned firms.

Regarding boards’ features, as shown in Model 2 in Table 5, only the independent directors on the board drive the gender diversity of the board (${\alpha }_2$ = 23.59; p-value = 0.078). This might suggest that independent directors on Saudi boards believe and trust women to strengthen their control over senior managers and are subsequently more likely to encourage the participation of females in the board structure. However, neither the SIZEBO nor the FP influences gender diversity on the board (${\alpha }_3$ = 9.386 with a p-value of 0.134 and ${\alpha }_5=$ 0.634 with a p-value of 0.30, respectively). Moreover, the results of Model 2 confirm that larger listed firms in Saudi Arabia are more likely to have greater proportions of female representation on the board of directors (${\alpha }_4=0.326$ and a p-value of 0.000).

The findings from step 3 provide insights into the dynamics between FAMOWN, GDBO, and audit quality demand. Interestingly, the inclusion of the mediator variable, GDBO, in Model 3 alters the connection between OWNFAM and audit quality, rendering the coefficient of family ownership insignificant, while the coefficient of GDBO is positively significant (${\alpha }_2$ = 12.57 with a p-value of 0.045). Thus, we suggest that GDBO acts as a mediating factor, indirectly influencing the relation between AUDREP and FAMOWN, which confirms the third hypothesis (H3). This outcome suggests that GDBO becomes the dominant determinant explaining audit quality demand in the third step of the SEM analysis. In return, we record a significant decrease regarding the effect of family ownership on audit quality demand (${\alpha }_1$ = −1.288 with a p-value of 0.248). Subsequently, we conclude that gender diversity on the board fully mediates the connection between audit firm reputation and family ownership. In other words, the negative effect of family ownership on audit quality demand, as illustrated in the first model, is fully explained by less board gender diversity. Consequently, the initial direct and negative relation between audit quality and family ownership disappears after including the GDBO, as shown in Model 3, Table 5. This result is consistent with that of Guizani and Abdelkarim (2021) considering board independence as a mediator in GCC companies and that of Abdel-Meguid et al. (2023) in companies in Egypt.

Our findings imply that Saudi companies with a high proportion of family shareholders should encourage the participation of women on the board to enhance audit quality. As stated in agency theory, the alignment of interests in family-owned firms leads to a lower demand for high-quality audits since family members can directly monitor their own businesses. However, within the same agency theory, there is also an emphasis on reputational concerns, particularly for women, who may seek to protect and enhance their reputation by hiring high-quality auditors. Consequently, greater gender diversity on the board can reduce the influence of family directors in constraining the demand for high audit quality. The stronger oversight power ensured by women on the board not only reduces potential agency conflicts in family-owned firms but also allows for the protection of the concerns of other stakeholders. From this perspective, our results align with stakeholder theory, indicating that even in family-owned firms with potential significant outside investors or minority shareholders, the inclusion of women on the board enhances the likelihood of hiring reputable auditors.

Regarding the control variables, Model 3 in Table 5 shows no significant influence of board features (independence and size) on audit quality demand. However, the empirical findings establish a significant effect of firm size on audit quality demand, consistent with the results of Models 1 and 2. This supports the argument that larger firms typically experience higher levels of agency conflicts and possess greater resources, which jointly explain their additional need for high-quality audits (Alsmairat et al., 2019).

Overall, the empirical results from the SEM analysis support the propositions of both agency theory and institutional theory, highlighting the complexity and contextual nature of the relationships between family ownership, audit quality demand, and board gender diversity. In countries with strong gender equality norms or institutional pressures, such as mandatory quotas for female representation on boards, family firms may face external incentives to increase board gender diversity and, in turn, recruit high-quality auditors. However, in most developing countries, particularly in Saudi Arabia, which has a male-dominated society, family-owned companies do not face external regulatory pressure to shape their board structures based on gender.

5.4. Robustness Check

To evaluate the robustness of our findings and to mitigate potential bias from omitted variables, we replicated the SEM using an alternative measure for the dependent variable. Accordingly, we revisited our main analysis, employing audit fees (AUDFEES) as a proxy for audit quality. Data for AUDFEES were collected from the Argam Database. Many scholars have used audit fees as indicators for assessing audit quality (Zhang & Yu, 2016; Abdel-Meguid et al., 2023). In Sanad and Al Lawati (2023) used audit fees as a proxy for audit quality to analyze the dynamics between ownership concentration and audit actions. In Saudi Arabia, Aljaadi et al. (2021) demonstrated a significant relationship between AUDFEES and audit quality. According to the meta-analysis by Gil et al. (2024) in which they analyzed 71 audit fee-focused studies, they concurred that family-owned businesses pay lower audit fees than their non-family counterparts and are thus billed less for auditing services. As a substitute metric for audit quality, we propose rerunning the empirical study with audit fees.

The results presented in

Table 6. SEM results for AUDIT FEES.

	Model 1 (AUDFEES)		Model 2 (GDBO)		Model 3 (AUDFEES)
	Coef	p-Value	Coef	p-Value	Coef	p-Value
FAMOWN	−1.14 *	0.076	13.38 **	0.026	−41.288	0.58
INDBO	10.86	0.149	23.59 *	0.078	30.341	0.82
SIZEBO	2.86 **	0.03	9.386	0.134	−32.9 *	0.098
FS	0.6 *	0.086	0.366 **	0.014	12.891 ***	0.001
FP	3.7	0.403	0.634	0.30	4.33 **	0.012
GDBO					1.57 *	0.067
Constant	25.73 **	0.024	−20.65 **	0.013	−7.31	0.435
R-Squared	0.127		0.298		0.37
Firm-Year Effect	Yes
Hausman Test	32.64	0.000	27.36	0.000	49.44	0.000
No. of Obs.	1407

*** p < 0.01, ** p < 0.05, and * p < 0.1.

mirror those in Table 5. Specifically, the inclusion of female directors on Saudi boards fully mediates the association between AUDFEES and FAMOWN. Thus, we deduce that the sensitivity analysis shows the robustness of the results obtained from using two different measures for audit quality in the Saudi context.

5.5. Endogeneity Test

To mitigate endogeneity concerns, we employed Two-Stage Least Squares (2SLS) regression with an instrumental variable, integrating industry and firm averages for FAMOWN and GDBO. These averages reflect prevailing industry norms and external pressures influencing firm decisions without directly impacting the demand for audit quality (Carter et al., 2003). The outcomes detailed in

Table 7. Endogeneity test −2 SLS.

Independent Variables	Industry and Firm Averages for Family Ownership and Board Gender Diversity
	Coefficient	p-Value	Partial R2	Adjusted Partial R2
FAMOWN	−0.123	0.121	0.358	0.344
GDBO	12.08 ***	0.002	0.324	0.318
Control variables
INDBO	6.85 *	0.09	0.631	0.611
SIZEBO	15.41 ***	0.000	0.519	0.425
FS	−12.46	0.124	0.476	0.349
FP	−3.511 *	0.061	0.321	0.318
Constant	23.138 ***	0.000
Obs	1407
Number of years	7
Overidentifying restrictions test	0.872

*** p < 0.01, and * p < 0.1.

, encompassing coefficients and p-values, closely correspond with the primary results outlined in Table 5 (Model 3). Furthermore, we gauged the credibility and explanatory capability of the instrument through Shea’s partial R², following the framework of Cameron and Trivedi (2021). The close alignment between the adjusted and unadjusted partial R² values confirms the robustness of the instruments (Angrist & Pischke, 2009). The partial R2 values in Table 7 delineate the extent to which the variance in the endogenous regressors (FAMOWN and GDBO) is elucidated by the instrumental variables. Notably, variables like INDBO (0.631), SIZEBO (0.519), and FS (0.476) demonstrate substantial explanatory power, affirming the robustness of the instrumental approach. Additionally, FAMOWN and GDBO exhibit partial R² values of 0.358 and 0.324, respectively, underscoring the pertinence of the instrumental technique employed, following econometric standards (Angrist & Hull, 2023). The results of the Hansen J test for overidentifying restrictions are presented in Table 7. The obtained p-value of 0.872 implies that the instrument is probably uncorrelated with the error term in the second-stage regression, thus validating its suitability for our 2SLS estimation. These findings offer strong empirical support for the hypotheses substantiated by the main regression analysis (Table 5, Model 3): family-owned companies are less likely to demand high audit quality, while organizations with gender-diverse boards showcase heightened preferences for top-tier audit standards within the Saudi Arabian setting.

6. Conclusions

Our study focuses on the mediating role of female directors on Saudi companies’ boards in the relationship between audit quality demand and family ownership. Like developed economies, the findings reveal the complex dynamics between family ownership, gender diversity on boards, and audit quality in the Saudi environment. Aligned with agency theory, the findings from the initial phase of the SEM analysis suggest that family-owned businesses exhibit a decreased propensity to seek high audit quality, primarily due to the minimal presence of agency conflicts. However, contrarily to stakeholder theory, the previous findings suggest that directors in family-owned firms may prioritize their interests potentially at the expense of external stakeholders. The negative relationship between family ownership and audit quality suggests that family firms may be less responsive to external stakeholders’ demand for transparency and accountability in Saudi Arabia. From the perspective of institutional theory, family-owned firms may face limited institutional pressures to maintain high audit quality as they tend to rely more on family governance and trust. In particular, social features such as the prominence of family and friend relationships over formal regulations, the prioritization of personal connections, and the role of Islamic law in resolving legal disputes significantly shape business practices in Saudi Arabia. These cultural features might explain the limited demand for high audit quality among Saudi family-owned companies, as illustrated in Model 1.

In the subsequent stage (step 3), upon the introduction of GDBO as a mediator, the direct adverse impact of FAMOWN on audit quality loses significance. Instead, GDBO emerges as the predominant factor, highlighting a complete mediation effect. Step 2’s positive correlation observed between FAMOWN and GDBO underscores the strategic significance of gender diversity in bolstering the corporate governance frameworks of Saudi organizations. Per the tenets of agency theory, this linkage could imply that boards with female representation offer more robust independent oversight, thereby stimulating a heightened requirement for top-tier audit standards. Consequently, gender diversity could pave the way for a more inclusive path driven by stakeholders, as diverse boards are inclined to advocate for enhanced governance structures, including elevated audit quality, to fulfill the expectations of a broader spectrum of stakeholders.

Our study yields several important implications that are closely tied to our findings. For investors, the presence of female directors in Saudi companies, mainly family-owned ones, should be viewed as a key indicator of effective corporate governance. Furthermore, investors may consider adjusting their strategies to prioritize companies with diverse boards as these firms are more likely to have a higher audit quality which, in turn, improves the trust in financial information and reduces agency costs. Regarding policymakers, the results highlight the need for the KSA to actively promote gender diversity initiatives within corporate boards. By encouraging the participation of female directors, governance standards can be improved, leading to more effective control of financial reporting practices. Concerning regulators, the findings indicate that greater effort should be made to promote gender diversity within corporate governance codes and guidelines by introducing mandatory measures, such as quotas for female representation on boards.

Despite this study’s intriguing findings, several limitations may affect the interpretation of our results and should be acknowledged. First, our empirical analysis is limited to non-financial companies listed in Saudi Arabia over a specific period. Future research could be expanded by exploring the impact of gender diversity in non-listed or financial firms. Additionally, the results are confined to Saudi Arabia and cannot be generalized to other developing countries, even within similar contexts like the GCC region, due to the unique institutional characteristics of each nation. Moreover, a potential bias could arise from the omission of other ownership structures, such as foreign or institutional ownership, which could significantly affect the demand for audit quality. Future studies should consider additional variables identified by scholars as key determinants of audit quality.