Auditor Independence as a Mediator between Governance and Financial Reporting Quality in Saudi Arabia

Abstract

This study examines whether perceived auditor independence mediates the relationship between corporate governance mechanisms and financial reporting quality (FRQ) in Saudi Arabia. Independence in appearance is examined as an indicator of assurance credibility among stakeholders. Survey data were collected from 316 informed professionals, including accountants, internal auditors, audit committee members, and academics, representing the financial, industrial, service, and regulatory sectors. Corporate governance was modelled as a reflective second-order construct comprising board independence, audit committee effectiveness, and transparency and disclosure. Hypotheses were tested using partial least squares structural equation modelling. Corporate governance positively influenced perceived auditor independence (β = 0.758) and FRQ. Perceived auditor independence was positively associated with FRQ (β = 0.339). The indirect effect was statistically significant (β = 0.257, 95% CI [0.172, 0.341]), whereas the direct effect of corporate governance on FRQ remained significant (β = 0.497), supporting partial mediation. Perceived auditor independence accounted for 34.1% of the governance–FRQ relationship and operated invariantly across financial and non-financial sectors. The findings indicate that governance arrangements can enhance reporting quality by strengthening stakeholders' confidence in auditors' independence, while the persistence of a significant direct effect confirms that governance also operates through additional reporting-quality mechanisms in this institutional context in Saudi Arabia.