Government procurement and financial statement certification: Evidence from private firms in emerging economies

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Government procurement and financial statement certification: Evidence from private firms in emerging economies Ole-Kristian Hope1,2, Shushu Jiang1 and Dushyantkumar Vyas3 1

Rotman School of Management, University of Toronto, Toronto, Canada; 2 BI Norwegian Business School, Oslo, Norway; 3 Department of Management – UTM, Rotman School of Management, University of Toronto, Toronto, Canada Correspondence: O Hope, Rotman School of Management, University of Toronto, Toronto, Canada e-mail: [email protected]

Abstract In this paper, we examine the monitoring role of government customers in emerging markets, a setting where public procurement is significant but the procurement institutions are weak. In these countries, financial statement certifications could be an important mechanism for a private firm to facilitate contracting with governments. Employing a sample of private firms across 98 emerging economies, we first document in-depth private-firm audit regulations for each country. We find that firms are more likely to have financial statements certified by an external auditor when they have government contracts. We further find that the association is less pronounced when governments have weaker monitoring incentives – when suppliers are subject to monitoring from tax authorities or creditors, when government contracting officials receive bribes, and when government spending is less transparent. We corroborate our inferences using the staggered adoption of an E-Procurement system to infer changes in governments’ monitoring incentives and several other robustness checks. Journal of International Business Studies (2020). https://doi.org/10.1057/s41267-020-00382-2 Keywords: government procurement; financial statement certification; private firms; emerging economies; auditing

Received: 17 February 2020 Revised: 24 September 2020 Accepted: 6 October 2020

INTRODUCTION Governments are significant purchasers of goods and services around the world. Global procurement by government agencies is approximately 9.5 trillion U.S. dollars each year, accounting for around one-fifth of total GDP (World Bank, 2017). Recent studies have documented the active monitoring role of government customers by examining the U.S. federal government procurement (e.g., Cohen, Li, Li, & Lou, 2020; Samuels, 2020), a setting where public procurement institutions are strong and government accountability is high. However, in countries with weaker public procurement institutions and lower government accountability, governments’ monitoring incentives and governance mechanisms that facilitate contracting between a firm and its government customers remain unclear. This paper intends to fill this gap in the

Government procurement and financial statement certification

literature by studying one specific governance mechanism for government contracting in developing countries – financial statement certification. Our research setting is economically important – government procurement represents a large marketplace in developing countries. Developing