Audit Quality Characteristics and Financial Reporting Quality Among Jordanian Small and Medium Enterprises: A PLS-SEM Approach

Abstract

This study aims to examine the influence of geographical distance, social distance, auditor independence, technical quality, and process quality on the quality of financial reporting, providing a comprehensive understanding of the aspects that determine audit effectiveness. The research employs a quantitative technique, using Partial Least Squares Structural Equation Modeling (PLS-SEM) with bootstrapping (5000 resamples) to assess hypotheses grounded on agency and signaling theories. Data was collected via a survey administered to managers and proprietors of small and medium-sized firms (SMEs). A total of 186 valid answers were gathered and examined to investigate the relationships among the variables. All five recommended parameters had a favorable and substantial influence on the quality of financial reporting. Spatial distance was recognized as the primary predictor, followed by process quality, social distance, technical quality, and auditor independence. The model explained 26% of the variance in financial reporting quality. This research is one of the first investigations to systematically analyze how certain variables of audit quality—specifically physical distance, social distance, auditor independence, technical competence, and process quality—affect financial reporting results. The main contribution is in the use of original survey data, which provides novel information about how organizations evaluate and choose audit service providers and how these decisions eventually affect reporting quality. The focus on small and medium-sized organizations enhances the importance, since these companies often encounter limitations that impede their capacity to uphold elevated reporting requirements. This research enhances the current literature by consolidating many dimensions of audit quality into a unified analytical framework, so providing a more thorough knowledge of the interrelated variables influencing financial reporting procedures, especially in emerging nations. The results provide pragmatic insights for regulators and practitioners aiming to bolster audit efficacy and improve the dependability of financial reporting in these circumstances.

1. Introduction

An increased focus on techniques of financial reporting has been seen in the early years of the 21st century (Campa & Laguecir, 2025). This trend has been mostly driven by a string of infamous accounting scandals that have occurred in recent years (Toms & Lin, 2025). The occurrences have resulted in an increased need for more transparency, the standardization of accounting procedures, and the implementation of more strong oversight mechanisms in order to address deficiencies in the quality of financial reporting information (Maniatis, 2022). The relevance of accounting information serves as an indicator of the quality of financial reporting, which is vital for promoting transparency, accountability, and decision-making that is informed by relevant information (Campa et al., 2025). According to Gibson (2013) and Landu et al. (2025), as well as Barrios et al. (2025), financial reports are essential for attracting capital and human resources, and as a result, they are able to cater to the various needs of a large number of stakeholders. When it comes to making investment decisions, prospective investors use these reports as a source of information; suppliers consider them when contemplating business collaborations; labor unions rely on them during negotiations; and managers use them to evaluate profitability, distribute resources, and monitor liquidity by analyzing assets and liabilities. The accuracy and reliability of financial statements, which outline the present economic status of the company, are critical factors in determining the quality of financial reporting (Pomeroy & Thornton, 2008). It is essential that these statements be free of significant faults and accurately reflect the current status of the economy. External auditors are necessary for ensuring quality since they provide independent verification of the correctness of financial statements (DeFond & Zhang, 2014; Zager et al., 2016). This makes them a vital component of quality assurance. The function of auditors extends well beyond the detection of infractions of accounting laws; they also play a significant part in maintaining the trust of stakeholders, safeguarding the image of the company, and avoiding the legal and financial repercussions that may result from misleading reporting efforts.

Over the course of the field of Financial Reporting (IFR), several previous academic investigations have mostly used content analysis approaches (Yassin, 2017) this technique employs a systematic approach to evaluating disclosure levels; nevertheless, it does not adequately take into consideration the environmental and perceptual factors that play a role in determining individual disclosure preferences. Additionally, there is a significant lack of awareness of the ways in which several aspects of audit quality, including auditor independence, geographical closeness, social distance, technical competence, and procedural integrity, influence the quality of financial reporting, particularly in emerging markets. It is the knowledge of the researcher that there have been no empirical studies conducted in Jordan that have extensively studied these components or evaluated the combined influence that they have on the quality of financial reporting from the perspective of management. Through the use of a quantitative, perception-oriented methodology that makes use of survey data collected from 43 manufacturing businesses in Jordan, the purpose of this study is to remedy these weaknesses. This research incorporates the five dimensions of audit quality into a unified empirical framework, thereby contributing to the existing body of literature on internal financial reporting (Bananuka, 2020; Hasan et al., 2022; Mokhtar, 2017). Furthermore, it provides the first empirical evidence from Jordan regarding the impact of these factors on the quality of financial reporting. The findings that are anticipated are likely to significantly improve three crucial areas: the theoretical understanding of the intricate relationship between audit quality and financial reporting; the advancement of IFR scholarship in emerging economies through insights that are contextually relevant; and the provision of recommendations that can be put into action by policymakers, regulators, and corporate governance bodies who are looking to improve transparency, credibility, and stakeholder trust in financial statements.

There are nine sections in this paper. The theoretical framework is presented in Section 2. Section 3 goes over the Literature Review and Hypotheses Development. The Research Methodology is presented in Section 4; The empirical results are presented in Section 5. The discussion presented in Section 5. The conclusion is presented in Section 7. The Practical and Theoretical Implications are presented in Section 8 and finally, Section 9 brings the Limitations and Recommendations for Future Research.

2. Theoretical Background

As a result of the enormous influence that these charges have on the value of a firm, there has been a rising interest among academics in the shifting relationship between agencies and the expenses that are associated with them in recent years (El-Ansary & Hamza, 2023). In previous studies (Samal & Yadav, 2025), it was found that the separation of ownership and control between managers (agents) and shareholders (principals) creates conflicts of interest. This is due to the fact that managers frequently prioritize short-term profits and personal compensation, whereas shareholders strive to increase long-term value. Because of this mismatch, which is sometimes referred to as the principal-agent problem, governance mechanisms are required in order to reduce agency costs. Aras and Crowther (2016) highlight the significance of both internal and external mechanisms in the process of resolving these conflicts. Internal mechanisms include things like board composition, ownership structure, directors’ equity holdings, gender diversity, audit committees, and internal audit functions. External mechanisms include things like audit quality, legal frameworks, governmental regulations, market competition, media scrutiny, and public financial statement assessments. Hasan et al. (2022) state that maintaining the integrity of financial reporting requires a high level of quality in the external audits that are performed. Chalaki et al. (2012) conducted an investigation into the connection between corporate governance and the quality of financial reporting in Nigeria. They did so by utilizing data from companies that were listed on the Nigerian Stock Exchange and operating in a variety of industries, including commodities, brewing, banking, beverages, oil and gas, and more, between the years 2006 and 2015. Among the corporate governance systems that were investigated were the following: board structure (size and independence), external audit quality (affiliation with Big Four companies), audit committee size, and board experience. In their research, they discovered that there was a significant positive link between the size of the board, the experience of the board, and the quality of the external audit with the quality of the financial reporting. However, they also discovered that larger audit committees and more board independence were related with worse reporting quality.

Abbadi et al. (2016) investigated the impact that the quality of corporate governance has on earnings management in Jordan. Earnings management is often considered to be a measure of the quality of financial reporting. For the purpose of this study, panel data were collected from industrial and service companies that were listed on the Amman Stock Exchange between the years 2009 and 2013. In order to evaluate the level of corporate governance, an index was used. This index consisted of components such as the board of directors, the number of board meetings that were held, and the roles of the audit, nominating, and compensation committees. A negative connection was found between all governance systems and earnings management, which suggests that greater governance, particularly via effective external audit monitoring, lowers earnings manipulation and promotes the openness and reliability of financial statements. The findings suggested that this association was negative. An investigation of the connection between governance structures and earnings management on a global scale was the subject of a meta-analysis that Inaam and Khamoussi (2016) carried out, taking into consideration 75 different articles. In their classification of governance mechanisms, they identified audit quality as an external mechanism, while the audit committee and board of directors were acknowledged as inside processes. Their findings consistently demonstrated that a robust board of directors, an effective audit committee, and larger audit firms significantly minimize earnings management, which ultimately results in an improvement in the quality of financial reporting.

The literature that was reviewed emphasizes, on several occasions, the significance of the quality of external audits in terms of significantly improving the quality of financial reporting in a variety of contexts. Research that was carried out in Nigeria (Chalaki et al., 2012), Jordan (Abbadi et al., 2016), and various international contexts (Inaam & Khamoussi, 2016) provides compelling empirical evidence that experienced and competent auditors, particularly those who are affiliated with reputable audit firms, significantly reduce earnings management while simultaneously improving the transparency and reliability of financial statements. Nevertheless, in spite of the substantial amount of data involved, there are still significant shortcomings. In the beginning, a number of earlier studies concentrated on the broad association between corporate governance and the quality of financial reporting. These studies often considered audit quality to be a single, all-encompassing indicator rather than a multidimensional construct. It is important to note that this perspective fails to take into account some aspects of audit quality, including auditor independence, physical distance, social distance, technical quality, and process quality, all of which have the potential to significantly impact reporting findings. Second, while there has been limited study conducted in Jordan, the majority of it focuses on governance mechanisms and earnings management. There has been very little direct investigation into how various aspects of audit quality jointly impact the quality of financial reporting from the point of view of management. Through the use of a quantitative survey methodology, this study investigates the influence that five distinct audit quality characteristics have on the quality of financial reporting in Jordan’s manufacturing sector. Not only does this contribute to the expansion of the existing body of literature on corporate governance and audit quality in emerging countries, but it also provides policymakers, regulators, and company boards with ideas that can be put into practice in order to improve financial transparency and create trust among stakeholders.

3. Literature Review and Hypotheses Development

3.1. Dependence of External Auditors

The autonomy of external auditors is vital for guaranteeing superior audits and is fundamental for maintaining the integrity and dependability of financial reporting. Auditor independence denotes the auditor’s ability to perform their duties with objectivity, unencumbered by any pressures that may undermine their neutrality or professional judgment (DeAngelo, 1981). When auditors maintain their independence, they are better equipped to detect and disclose substantial misstatements or irregularities, hence enhancing the accuracy and transparency of financial accounts (Carcello & Nagy, 2004). Research repeatedly demonstrates that auditor independence reduces earnings management and financial misreporting, which are common consequences of agency conflicts between managers and shareholders (Krishnan & Visvanathan, 2008). Companies audited by independent and recognized auditors, often associated with the Big Four audit firms, generally exhibit superior quality in financial reporting (Francis, 2004). Conversely, compromised auditor independence, stemming from financial ties, non-audit services, or personal affiliations with management, may diminish audit efficacy and undermine stakeholder confidence (Srinidhi et al., 2014). In developing nations, safeguarding auditor independence is notably challenging owing to legislative inadequacies and market circumstances; yet, it is essential for improving corporate governance and bolstering investor trust (Chi et al., 2009). Consequently, fostering and safeguarding the autonomy of external auditors is a fundamental policy objective to preserve the integrity of financial reporting systems. Therefore, the following hypothesis is posited.

H1. 

Independence of the external auditor has a significantly positive relationship with the quality of financial reporting.

3.2. Spatial Distance of External Auditors

The geographical distance, also known as physical distance, that exists between the client firm and the external auditor has the potential to have a substantial impact on the effectiveness of audits and, therefore, the quality of financial reporting. The capacity of auditors to conduct full onsite assessments is often hindered by increased geographical distance, which also restricts their ability to contact directly with management and internal auditors (Cheon et al., 2017). Based on Alzoubi (2016), this separation has the potential to worsen information asymmetry and hinder auditors’ access to evidence that is timely, thorough, and reliable. As a result, the chance of undiscovered misstatements or fraudulent activities is increased inside the organization. On the other hand, proximity enables auditors to carry out audit procedures that are more comprehensive, cultivate stronger relationships with client personnel, and acquire a more profound understanding of the operational context of the client, which ultimately results in an improvement in audit quality and a reinforcement of the reliability of financial statements (Pham et al., 2023). There is a correlation between increased spatial distance and a lower audit quality and a higher incidence of financial misreporting, according to empirical studies (Gul et al., 2013; Francis & Wang, 2008). This highlights the necessity of reducing spatial barriers by either maintaining frequent visits or making use of advanced communication technologies. Furthermore, the following hypothesis is presented as a result:

H2. 

Spatial distance has a significantly positive relationship with the quality of financial reporting.

3.3. Social Distance of External Auditor

Social distance refers to the perceived or real degree of separation between the external auditor and the management or stakeholders of the audited business. It encompasses factors such as disparities in social rank, professional backgrounds, culture, ethnicity, and interpersonal dynamics that might influence auditor behavior and independence. A diminished social distance—signifying greater relationships or familiarity between auditors and clients—can jeopardize auditor objectivity and independence, increasing the likelihood of biased judgments and compromising audit quality (Barrainkua & Espinosa-Pike, 2015). Auditors who are integrated into the same social networks or maintain amicable ties with client personnel may be more susceptible to conflicts of interest, resulting in a more forgiving perspective on aggressive accounting methods or misstatements (Gul et al., 2018). Conversely, an increased social distance enhances auditor independence by diminishing personal connections and emotional biases, so allowing auditors to exercise professional skepticism more effectively (Hay et al., 2006). Auditors must keep an appropriate social distance to resist management pressure, guarantee comprehensive audit procedures, and enhance the credibility and dependability of financial reporting. Research indicates an association between social distance and the quality of financial reporting, mediated via its impact on auditor independence. Knechel et al. (2013) found that external auditors with less social connections to management are more likely to provide correct audit conclusions, hence reducing earnings management and improving the accuracy of financial statements. Therefore, the first hypothesis is posited:

H3. 

Social distance of external auditors has a significantly positive relationship with the quality of financial reporting.

3.4. Technical

The technical quality of financial reporting reflects the effectiveness of financial statements in adhering to established accounting standards, ensuring correctness, dependability, and a true representation of a company’s financial status and performance. This quality includes conformance to International Financial Reporting Standards (IFRS), accurate application of accounting standards, prompt identification of transactions, and mitigation of substantial misstatements (Barth et al., 2008). An elevated standard of technical quality enhances the credibility of financial reports, assists stakeholders in making informed decisions, and reduces the danger of spreading inaccurate information in the market (Dechow et al., 2011). In developing economies like Jordan, technical quality is often compromised due to insufficient professional competence, ineffective enforcement mechanisms, and limited access to continuous professional development for both preparers and auditors (Al-Akra et al., 2016). The technical quality of financial reporting is closely linked to corporate governance frameworks, the quality of audits, and the level of regulatory monitoring (Francis, 2011). Robust governance frameworks and adept external audits may augment adherence to accounting standards, hence enhancing the technical integrity of financial statements and cultivating increased investor trust. Consequently, the following hypothesis is proposed:

H4. 

Higher technical quality in financial reporting has a significantly positive relationship with the quality of financial reporting.

3.5. Process Quality

The responsiveness, flexibility, and communication skills of auditors are some of the variables that contribute to the quality of the auditing process (Fossung et al., 2020; Kirchmajer & Patterson, 2004). The quality of the auditing process is strongly related to the effectiveness of the auditing services that are offered. The whole audit experience is substantially improved by a procedure of high quality, which demonstrates expertise, strict adherence to ethical norms, and thorough consideration of the requirements of the client. In turn, this helps to create confidence between auditors and clients, which is vital for providing customers with financial reporting that is both transparent and credible. Previous research (Kirchmajer & Patterson, 2004) has shown that the perceived credibility and utility of financial statements may be improved by the use of effective communication, timely replies, and flexibility in the management of audit-related concerns. Furthermore, Knechel et al. (2013) found that high-quality audit systems make it easier to identify mistakes and anomalies, which in turn strengthens the accuracy and reliability of the financial information that is presented. According to Al-Shaer and Zaman (2018), the quality of the auditing process is very important in developing economies, which may have institutional frameworks that are not as robust. This is because the auditing process helps to reduce information asymmetries and boosts stakeholder trust in financial reporting. On the basis of these observations, it is plausible to put up the hypothesis that is presented below:

H5. 

Process quality has a significantly positive relationship with the quality of financial reporting.

4. Research Methodology

This study aims to analyze the impact of audit quality—encompassing auditor independence, spatial distance, social distance, technical quality, and process quality—on financial reporting outcomes. This study defines small-sized enterprises as those employing 10 to 49 full-time workers, whilst medium-sized firms are described by having 50 to 249 full-time employees. This research focuses on a company’s perspectives on audit quality and financial reporting, with the firm serving as the unit of analysis when the Owner/Manager is identified as the principal responder. An Owner/Manager usually represents the Owner/Manager of a small to medium-sized firm (SME) and is often involved in financial reporting choices (Damanpour & Schneider, 2006). Data collection was conducted using a survey including six sections: auditor independence, geographical distance, social distance, technical quality, process quality, and financial reporting, as shown in Appendix A. A 5-point Likert scale was used to assess the primary latent factors, modified from previous research. The instrument underwent pilot testing with 31 selected SME managers. Out of the 941 identified businesses, 200 were selected for the pilot testing phase. The questionnaire was disseminated via self-delivery for data collection. The researchers manually sent the questionnaire to all 741 businesses excluded from the pilot study, identified from the directory (941 firms satisfied the SME criteria used in this research). Subsequent to many follow-up processes, a total of 186 replies were deemed legitimate. The response rate was 25.2 percent. The quantity of valid replies obtained satisfied the minimal sample criterion. The data collection process was conducted between November 2025 and December 2025.

5. Empirical Results

5.1. Demographic Characteristics

The sample consists of 186 respondents from various positions inside firms registered in the Amman Chamber of Industry Directory (2024).

Table 1. Position in the organization.

Position	N	%
Owner	45	24.3
CEO	3	1.8
General manager	15	7.8
Accounting manager	62	33.6
Senior accountant	34	18.3
Other	27	14.3
Total	186	100

indicates that the predominant segment of respondents comprises owners (24.3%), underscoring the critical significance of ownership in the decision-making processes that affect audit quality and financial reporting. Accounting managers constitute the second-largest cohort (33.6%), highlighting their substantial involvement in financial operations and audit activities. General managers constitute 7.8% of the respondents, indicating their positions in management supervision. Senior accountants and other personnel constitute 18.3% and 14.3%, respectively, fulfilling essential functions in the financial reporting procedures at several levels. CEOs represent the smallest fraction (1.8%), perhaps attributable to the organizational framework of small and medium-sized firms (SMEs) in the Jordanian industrial sector. This distribution offers a comprehensive perspective on the elements influencing audit quality as evaluated by persons with varying degrees of responsibility and involvement in financial reporting.

The businesses in the sample have been categorized into two classifications based on the number of employees, in line with commonly adopted SME criteria. Specifically, firms employing between 1 and 49 employees are classified as small-sized enterprises, whereas those employing between 50 and 249 employees are categorized as medium-sized enterprises. This classification enhances the clarity of the study regarding the influence of firm size on audit quality and financial reporting outcomes in the Jordanian industrial sector.

Table 2. Client auditing experience (number of years involved in the audit process).

Number of Years Involved	N	%
1–5	172	55.5
6–10	96	31.0
11–15	18	5.8
16–20	11	3.5
21–25	6	1.9
26–30	4	1.3
More than 30	3	1.0
Total	310	100.0

reveals that a significant majority of participants (55.5%) had minimal expertise in audit procedures (1–5 years), indicating that the audit workforce is mostly composed of early-career professionals. This indicates a dynamic and developing labor market where new entrants are progressively assimilated into auditing positions. Furthermore, 31.0% of respondents belong to the 6–10 years group, indicating a significant presence of mid-level professionals who likely enhance operational efficiency and continuity within audit activities. Conversely, the percentage of highly experienced individuals is quite little. Individuals with over 20 years of experience comprise just 4.2% of the sample, suggesting that senior experts are inadequately represented in direct audit operations. This might be ascribed to career advancement trends, as seasoned auditors move into senior management, advising, or consultant jobs instead of persisting in conventional audit positions. This distribution illustrates a balanced but experience-biased framework within the auditing profession in Jordan, marked by a robust foundation of early-career auditors complemented by a reasonable share of seasoned professionals. This composition aligns with the evolving landscape of the auditing business, influenced by legislative modifications, heightened demand for assurance services, and persistent professional migration.

5.2. Assessment of Measurement Model

Since stated by Sarstedt et al. (2022), evaluating the measurement model (outer model) is a crucial step in the Partial Least Squares Structural Equation Modeling (PLS-SEM) process, since it determines the dependability of the observed indicator constructs. If any signs are considered unreliable, the future evaluation of the structural model (inner model) will be invalidated. The assessment of the measuring model encompasses the reliability and validity of constructs and their corresponding indicators. Reliability was assessed using Cronbach’s alpha (CA) and composite reliability (CR).

Table 3. Measurement Model Indicators with Reliability and Validity Values.

Latent Construct	Item	Item Loading (>0.4)	Cronbach’s Alpha (>0.7)	Composite Reliability (>0.7) and AVE (>0.5)
Spatial Distance (SPD)	SPD1	0.854	0.837	0.879/0.553
	SPD2	0.75
	SPD3	0.737
	SPD4	0.866
	SPD5	0.899
Social Distance (SD)	SD1	0.793	0.836	0.874/0.541
	SD2	0.882
	SD3	0.796
	SD4	0.85
Auditor Independence (AI)	AI 1	0.794	0.853	0.894/0.627
	AI 2	0.74
	AI 3	0.721
Technical Quality (TQ)	TQ1	0.79	0.849	0.893/0.628
	TQ2	0.726
	TQ3	0.73
	TQ4	0.808
	TQ5	0.77
	TQ6	0.725
	TQ7	0.791
	TQ8	0.832
	TQ9	0.729
Process Quality (PQ)	PQ1	0.832	0.717	0.835/0.631
	PQ2	0.873
	PQ3	0.716
	PQ4	0.761
	PQ5	0.701
	PQ6	0.785
	PQ7	0.702
	PQ8	0.838
Financial Statements Presentation (FSP)	FPS1	0.787	0.853	0.899/0.692
	FPS2	0.794
	FPS3	0.866
	FPS4	0.811
	FPS5	0.844
	FPS6	0.766
	FPS7	0.833
	FPS8	0.807
	FPS9	0.872
	FPS10	0.885
	FPS11	0.713
	FPS12	0.853
	FPS13	0.875
	FPS14	0.779
	FPS15	0.791

Source: The author.

demonstrates that the CA and CR values for all constructs above the suggested level of 0.70, indicating adequate internal consistency and construct dependability (Cronbach, 1951; Hair et al., 2014). Convergent validity was evaluated by the average variance extracted (AVE), with all constructs exhibiting AVE values over the 0.50 criterion, thus confirming sufficient convergent validity (Hair et al., 2014). The dependability of indicators was validated by confirming that all factor loadings above the minimal threshold of 0.40 (Hair et al., 2014), as seen in Table 3. Discriminant validity was assessed using the Fornell–Larcker criteria, which contrasts the square root of the AVE for each concept with the inter-construct correlations.

Table 4. AVE Square Root.

	FSB	SPD	SD	AI	TQ	PQ
FSP	0.743
SPD	0.383	0.738
SD	0.451	0.347	0.794
AI	0.288	0.386	0.317	0.733
TQ	0.146	0.160	0.196	0.025	0.723
PQ	0.372	0.306	0.247	0.659	0.088	0.832

Source: The author. Note: The bold values represent the square root of the AVE.

demonstrates that the diagonal values (square roots of AVE) exceed the corresponding correlations across constructs, hence confirming discriminant validity (Fornell & Larcker, 1981). Considering all reported indicators, the measurement model meets the necessary criteria for reliability, convergent validity, and discriminant validity at both the concept and indicator levels. Consequently, it is appropriate to proceed with the assessment of the structural model and the examination of the proposed linkages. The findings validate the construct validity and reliability of the measurement model, confirming that the constructs may be dependably used in the ensuing structural model analysis.

5.3. Assessment of the Structural Model

Upon concluding the assessment of the measurement model (outer model), the subsequent essential step in Partial Least Squares Structural Equation Modeling (PLS-SEM) is the examination of the structural model (inner model). This phase examines the suggested linkages among latent constructs, emphasizing the direction, strength, and significance of the connections between independent variables (predictors) and dependent variables (outcomes) (Henseler & Fassott, 2010; Hair et al., 2014). In this study, assessing the structural model is essential for comprehending how various elements of audit quality affect financial reporting results. This research elucidates the substantial influence of several audit quality parameters on the quality and dependability of financial reports by evaluating path coefficients and their significance levels. This assessment often involves analyzing route coefficients (β), their associated t-values and p-values derived from bootstrapping methods, together with the coefficient of determination (R²) for the endogenous constructs. Elevated R² values indicate robust explanatory capability of the model, but substantial path coefficients validate the suggested direct relationships among variables. The assessment of the structural model not only examines the presented hypotheses but also elucidates the relative significance of each audit quality attribute in accounting for differences in financial reporting quality. This immediately corresponds with the primary aim of this research, which is to assess and substantiate the impact of audit quality on the efficacy of financial reporting.

The assessment of the five hypotheses was based on the analysis of the standardized pathways. The substantial levels of these routes were established using the bootstrapping test, using 5000 resamples, with the findings shown in

Table 5. Result of Hypotheses Testing of the Direct Relationship Model.

Hypothesis No.	Relationship	Path Coefficient	t-Value	p-Value	Decision
H1	SPD-EPS	0.393	5.977	0.000 ***	Supported
H2	SD-EPS	0.184	2.688	0.013 **	Supported
H3	AI-EPS	0.099	1.550	0.018 **	Supported
H4	TQ-EPS	0.137	1.716	0.039 **	Supported
H5	PQ-EPS	0.214	2.229	0.049 **	Supported

Source: The author. Note: Significant ** p < 0.05 and *** p < 0.01 (one-tailed test).

. The evaluation of R² as a descriptive statistic indicates that the research model explains 26% of the variance in financial reporting. The assumptions about Spatial Distance (SPD) (H1) (p < 0.01), Social Distance (SD) (H2) (p < 0.05), Auditor Independence (AI) (H3) (p < 5), Technical Quality (TQ) (H4) (p < 0.10), and Process Quality (PQ) (H5) (p < 0.05) have been substantiated. Table 5 provides a detailed description of the β-values, t-values, and p-values related to all hypotheses.

6. Discussion

As a result of the lack of a theoretical framework for financial reporting quality, the purpose of this research was to evaluate the perceived effect of audit quality and its components from the viewpoint of an organization. The purpose of this study was to explain the connection between audit quality and the presentation of financial reports by presenting a complete model that used Agency Theory, Signaling Theory, and the Resource-Based View. An examination of the statistical data reveals that the factors of Spatial Distance (SPD), Social Distance (SD), Auditor Independence (AI), Technical Quality (TQ), and Process Quality (PQ) are crucial components that have an impact on the presentation of financial statements (FSP).

The most significant correlation was found to be with Spatial Distance (β = 0.393, t = 5.977, p < 0.001), which suggests that the proximity of auditors to auditees by physical proximity is of utmost importance in enhancing the quality of financial reporting. This finding is in line with the findings of the research carried out by Rahaman et al. (2023), which demonstrated that being geographically close to one another improves the effectiveness of communication, lessens the likelihood of misunderstandings, and deepens professional ties. Furthermore, proximity allows auditors to conduct more complete exams and get a deeper insight into the operations of the client, which results in a reduction in the possibility of errors or omissions in financial statements (Francis, 2004). Therefore, it seems that geographical proximity helps to reduce information asymmetry and results in an improvement in audit efficiency. Furthermore, it is worth noting that the Social Distance factor had a positive and statistically significant influence (β = 0.184, t = 2.688, p < 0.05), indicating that the quality of social contacts and connections between auditors and clients has an effect on the outcomes of financial reporting. According to the hypothesis put forward by de Villiers et al. (2022), trust and social linkages reduce agency conflicts and increase transparency, hence contributing to an improvement in audit quality. According to Alzoubi (2016), social proximity improves communication, which in turn enables auditors to uncover problems that may not be obvious using traditional procedures alone. Consequently, the cultivation of social contacts has the potential to considerably increase auditors’ abilities to discover financial inconsistencies and to strengthen the trustworthiness of reporting.

Despite the fact that it has a relatively low path coefficient (β = 0.099, t = 1.550, p < 0.05), auditor independence is an essential factor in determining the quality of financial reporting. This lends credence to the long-held beliefs of DeAngelo (1981) and Carcello and Neal (2003), which state that auditor independence is essential for the delivery of audit findings that are unbiased and objective. Independence reduces the likelihood of any conflicts of interest and lessens the impact of management pressures, which ultimately results in an increase in the credibility of financial statements. There is a correlation between a lack of independence and an increased chance of audit failure and financial misreporting (Kueppers & Sullivan, 2010). For this reason, maintaining the independence of auditors is very necessary in order to safeguard the trustworthiness of financial information. The results of the study indicated that the technical quality of audit procedures has a beneficial impact on the quality of financial reporting (β = 0.137, t = 1.716, p < 0.10). This finding is in agreement with Francis (2004), who argued that the use of advanced auditing techniques and technology boosts the auditor’s ability to recognize errors and irregularities in the data. Auditors that possess advanced technical competency are able to carry out comprehensive risk assessments and carry out appropriate substantive tests, which ultimately results in an increase in the dependability of audit evidence and final reports. For this reason, it is essential to make investments in auditor training and audit technology in order to improve the standards of financial reporting requirements. The results of the study indicate that Process Quality has a significant positive influence (β = 0.214, t = 2.229, p < 0.05). This finding emphasizes the need of efficient audit procedures, which include responsiveness, flexibility, and conformity to professional standards. Kirchmajer and Patterson (2004) made the discovery that higher process quality leads to increased customer satisfaction and resulting in an improvement in perceived audit value, which in turn leads to increased compliance and transparency. Procedures that are effective ensure that audits are carried out in a logical and complete manner, hence reducing the risk of oversight or manipulation. It is clear from this finding that, in addition to technical capabilities, the methodology and rigor of audit execution are very important factors to consider when determining the quality of the product.

7. Conclusions

The purpose of this research was to investigate the factors that can affect the quality of financial reporting, including the effect of physical distance, social distance, auditor independence, technical quality, and process quality. Based on the data, it can be concluded that each of the five components significantly enhances the quality of the reporting, and together, they account for over twenty-five percent of the observed variation. It is noteworthy that the geographical distance involved was shown to be the most significant factor. The findings of this investigation suggest that the physical closeness between auditors and clients is more relevant than is often believed, and that this proximity has a direct impact on the efficiency of audits as well as the dependability of public financial statements. The study emphasizes the relevance of strong professional relationships and auditor independence, among other geographical considerations, in the process of encouraging improved reporting. It is abundantly obvious that there is a connection between trust and the dependability of certain financial reports. Additionally, technical expertise and stringent auditing processes are essential components. The research indicates an agreement among experts that having the proper skills and meticulousness in audits is not just a procedural formality but also a basic component of exceptional financial reporting. This consensus is highlighted by the fact that the study was conducted. Our knowledge of audit quality is improved as a consequence of these findings, which clearly demonstrate that audit quality encompasses more than just basic checklists and regulatory compliance. Because of the significant impact that the interaction of physical, social, and technical aspects has on the results of reporting, there is a need for further research to be conducted by both academics and regulatory agencies.

8. Practical and Theoretical Implications

This research theoretically combines relational factors (spatial and social distance) with technical elements (independence, technical proficiency, and process quality), thereby enriching the literature on audit quality by highlighting the necessity of transcending social and spatial barriers in auditor-client interactions. Specifically, this research focuses on the importance of overcoming cultural and geographical barriers. According to agency and signaling theories, which propose that interactions that are more intimate and transparent reduce the amount of information asymmetry and increase the level of trust among stakeholders, this is consistent with the findings. It is essential for legislators, regulators, and auditing companies to have access to the information that this research offers. Through the encouragement of auditors to maintain physical proximity to consumers and build powerful social ties, it is possible that communication and audit outcomes will be improved. Maintaining the independence of auditors is a critical need for maintaining audit integrity. Furthermore, in order to maintain and improve audit quality, it is essential to make investments in auditor education, to make use of various advanced auditing technologies, and to refine audit processes via the use of standardized procedures that are nevertheless adaptive. In conjunction with one another, these techniques strengthen the confidence of stakeholders and promote enhanced transparency and efficiency in the financial capital markets.

9. Limitations and Recommendations for Future Research

According to this research, there are a few limitations that should be taken into consideration. It is difficult to draw conclusions about causality based on the cross-sectional character of the study; hence, longitudinal studies are essential for gaining a more profound understanding of the dynamics that are present within the connections that were investigated. The context of the study, which may be limited to a particular nation or industry, may make it difficult to generalize the findings to a variety of other contexts. Furthermore, despite the fact that the model exhibits a significant amount of explanatory power, it suggests that the quality of financial reporting is likely influenced by other factors that have not been further investigated. As a result of the dependence on self-reported measurements, which raises the possibility of bias, it is suggested that future research should add more objective performance indicators in order to confirm the findings. When doing subsequent research, it is important to use longitudinal designs so that causation and temporal effects may be extensively investigated. In order to strengthen the external validity of the findings, it is recommended that research be expanded to include a variety of geographical, cultural, and industrial settings. In addition, it is advised that other drivers, such as legislative frameworks, organizational culture, and improvements in auditing technology, be investigated in order to construct a more comprehensive model of the quality of financial reporting. The use of qualitative methods may also result in the acquisition of more profound understandings of the dynamics of auditor-client interactions as well as the implications of interpersonal and geographical distances. In conclusion, doing research on moderating or mediating variables, such as trust, audit firm characteristics, or cultural dimensions, may provide light on the processes that are responsible for these correlations.