sustainability

Article
ESG Performance, Auditor Choice, and Audit Opinion:
Evidence from an Emerging Market
Ahmed Diab 1,2 and Aref M. Eissa 3,4, *

1 Accounting Department, Prince Sultan University, Riyadh 11586, Saudi Arabia; adiab@psu.edu.sa
2 Faculty of Commerce, Beni-Suef University, Beni-Suef 62521, Egypt
3 Faculty of Commerce, Cairo University, Cairo 12613, Egypt
4 Accounting Department, Majmaah University, Al-Majmaah 11952, Saudi Arabia
* Correspondence: aref_mahmoud_issa@foc.cu.edu.eg

Abstract: This study examines the effect of environmental, social, and governance (ESG) performance
on auditor choice and audit opinion for Egyptian-listed firms. We use univariate and multivariate
analyses of 612 firm-year observations for a sample of 68 firms listed on EGX100 over 2014–2022
using binary logistic regression models. Consistent with the ethical perspective of corporate social
responsibility, we found that firms listed in the ESG index are more likely to assign one of the Big4
auditors, and less likely to receive a qualified opinion. Through an additional analysis, we found that
COVID-19 moderates the relationship between ESG performance, auditor choice, and audit opinion.
Our results confirm the value of ESG performance for audit practices in emerging economies. This
research indicates that ESG performance can enhance financial reporting quality. Further, it ensures
that binding guidelines and regulations are crucial to oversee corporate ESG performance, especially
during crisis times, and enhance investors’ protection and firms’ sustainability.

Keywords: ESG performance; auditor choice; audit opinion; Egypt

1. Introduction
Citation: Diab, A.; Eissa, A.M. ESG
Performance, Auditor Choice, and There is a recent growing awareness concerning the value of environmental, social,
Audit Opinion: Evidence from an and governance (ESG) reporting and performance, and that ignoring ESG disclosure could
Emerging Market. Sustainability 2024, negatively affect a firm’s image and, hence, its market value [1,2]. Recent firms’ scandals
16, 124. https://doi.org/10.3390/ and collapses worldwide have motivated modern enterprises to consider ESG seriously
su16010124 when formulating or reviewing their strategies [3,4]. The majority of the literature has
examined the financial implications of ESG performance and disclosure (e.g., [5–11]). How-
Academic Editors: Nicola Raimo,
ever, it is also crucial to examine the strategic, not only financial, effects of ESG [12–14].
Massimo Mariani, Alessandra
Caragnano and Filippo Vitolla
Along with this direction, recent studies have examined the implications of ESG perfor-
mance and disclosure for the information environment and transparency [15]. That is,
Received: 28 October 2023 with ESG, it is anticipated that firms would act ethically considering the interests of all
Revised: 11 December 2023 stakeholders [16,17], which can enhance their information environment and augment their
Accepted: 17 December 2023 transparency level [18,19]. Against this background, ESG might have implications for
Published: 22 December 2023
audit-related decisions, practices, and outcomes [20]. We believe that firms’ ESG perfor-
mance and disclosure could have consequences for their auditor choice and the outcome
of the audit process. Our study objective is twofold. It examines the extent to which the
Copyright: © 2023 by the authors.
firms listed in the ESG index act ethically concerning financial reporting, by assigning
Licensee MDPI, Basel, Switzerland. higher-quality or Big-4 auditors. Further, it investigates whether these firms provide more
This article is an open access article accurate accounting information, and hence, they are less likely to receive a qualified audit
distributed under the terms and opinion. In doing so, we focus on a developing market—the Egyptian stock market.
conditions of the Creative Commons As opposed to Western developed markets, developing ones are more subject to the
Attribution (CC BY) license (https:// impact of severe information asymmetry and agency costs [21–23]. This situation is due to
creativecommons.org/licenses/by/ several reasons, including the existing weak legal systems [24] and ineffective corporate
4.0/). governance mechanisms in these markets [25,26]. In such developing contexts with higher

Sustainability 2024, 16, 124. https://doi.org/10.3390/su16010124 https://www.mdpi.com/journal/sustainability

Sustainability 2024, 16, 124 2 of 18

information asymmetry, auditors tend to play a vital role [27–29]. An external audit can act
as a mechanism to protect investors’ interests by uncovering managerial manipulation by
adjusting both income-increasing and income-decreasing accruals [30–33].
We address the Egyptian market because, in recent years, there has been an increasing
focus on the importance of ESG practices in its business sector. The government of Egypt
has recently implemented policies and regulations to promote sustainable development
and encourage firms to adopt responsible business practices (see [34,35]). For example, the
Ministry of Investment and the Egyptian Institute of Directors introduced the corporate
governance code in 2005 as guidelines for firms listed on the Egyptian Stock Exchange.
In 2016, the Egyptian Financial Supervisory Authority replaced the existing governance
code with revised detailed governance rules to be applied by both listed and unlisted firms.
The new rules highlighted the value of disclosing nonfinancial information, including
ESG, to consider the interests of all stakeholders [36]. Another important landmark in
enhancing sustainability performance in the Egyptian market was the application of the
S&P/EGX ESG index in 2010. This index identifies the best-performing companies listed
in EGX 100 concerning environmental, social, and corporate governance activities and
reporting [5]. In 2019, the Egyptian Ministry of Manpower and Migration and the Egyptian
Ministry of Environmental Affairs issued Law No. 12 to promote sustainable development
by protecting workers’ rights and enhancing work conditions. In the same year, the
government formulated its national strategy to stress the importance of having a sustainable
and responsible business environment. Further, in its 2020 report, the Egyptian Ministry
of Investment and International Cooperation stressed the importance of increasing the
share of renewable energy in the country’s energy mix. In 2021, the Egyptian Financial
Supervisory Authority issued its guidelines for environmental and social risk management
for the business sector. Such guidelines aimed to reduce the environmental and social
risks associated with operational and financial activities [37]. However, the real impact
of these activities is minimal due to the lack of a binding legal system that monitors and
enforces compliance with the existing sustainability-related rules and regulations [36]. This
unique context has motivated us to examine the implications of such a new context for
audit-related practices—namely, auditor choices and the audit process outcome.
This study contributes to the literature concerned with the implications of ESG per-
formance on auditor choice (AC) and audit opinion (AO). To our knowledge, this is the
first study that examines the implications of ESG for AC and AO in Egypt as an influential
emerging economy in the Middle East and North Africa region. Binary logistic regression
(BLR) analysis showed that ESG firms are more likely to assign a Big4 auditor, and these
firms are less likely to receive a qualified audit opinion. Moreover, as additional analyses,
we considered the effects of COVID-19 on the relationship between ESG performance, AC,
and AO. The results indicated that COVID-19 moderates the relationships between ESG
performance, AC, and AO. The findings revealed an increased probability of ESG firms
assigning one of the Big4 auditors during COVID-19. However, the results suggested an in-
creased likelihood of ESG firms receiving a qualified audit opinion during COVID-19. Our
results provide significant evidence to policymakers responsible for formulating guidelines
and regulations to oversee firms, enhance governance, and protect stakeholders’ interests,
especially during crises. Further, in line with the current findings, investors are advised to
consider ESG performance while making investment decisions, especially during crises
such as COVID-19.
The remainder of the paper is structured as follows. Section 2 reviews the literature
and develops the study hypotheses. Section 3 outlines the research methods. Section 4
presents and discusses the study findings. Finally, Section 5 concludes the paper.

2. Literature Review and Development of Hypotheses

The literature reveals two main streams regarding the perceptions and implications of
ESG performance. On the one hand, it is anticipated that firms adhering to ESG performance
and reporting have motives to be honest and act ethically concerning all stakeholders [17].
Sustainability 2024, 16, 124 3 of 18

This is because ESG responsibility requires firms to meet the economic, legal, ethical,
and voluntary expectations of society’s constituents [38]. In other words, commitment
to ESG would require firms to treat stakeholders ethically or responsibly along with
the principles of modern civil societies. This is consistent with the stakeholder theory
postulating that corporate management should give equal attention to all stakeholders,
rather than serving the interests of a particular group, namely shareholders [39]. ESG
performance and disclosure is one way to achieve this social objective [40]. According to
Branco and Rodrigues, social responsibility and reporting involve compliance with a set of
ethical standards that govern the decision-making process within firms, in a way that limits
harm to society or stakeholders [41]. Focusing on Turkey, Aslan and Şendoğdu found that
social responsibility influences corporate ethical values and behaviors positively [42].
On the other hand, from an opportunistic perspective, ESG responsibility and re-
porting might be perceived by some companies as a means of greenwashing—that is, to
polish their image [43] or to hide the negative or irresponsible behaviors of corporate
management [44,45]. In this case, the ‘apparent’ ethical behavior of socially responsible
firms would be mainly used as a tool by corporate management to attain some personal
benefits; rather than benefiting all stakeholders [29]. In this regard, Prior et al. showed that
social responsibility disclosure may be used as a means of managing legitimacy, by influenc-
ing public perception without a real positive change in the behavior of the entity [46]. For
instance, it can be used to immunize corporate management that manipulates profits [46].
Hurst indicates that the presence of an ethical code and social policies in the firms does
not necessarily guarantee the ethical treatment of stakeholders [47]. Lanis and Richardson
showed that higher levels of social responsibility disclosures are associated with aggressive
tax practices, which contribute to tax evasion [29]. Nirino et al. did not find a positive mod-
erating influence of ESG concerning the association between controversies and financial
performance [48].

2.1. Corporate Social Responsibility (CSR) and Auditor Choice

From an opportunistic perspective, companies may engage in ESG to offset their
corporate irresponsible behaviors, enhance their corporate image, or gain legitimacy to
operate [45,49]. It is believed that companies with such opportunistic perspectives will
not commit to corporate ethical conduct and hence, they may not demand a higher audit
quality. In this regard, using U.S. data, Lamptey et al. suggested that CSR activities may be
associated with more audit complexities and risks [50].
In contrast, from the ethical perspective, it is believed that ESG performance and
reporting would contribute to better accounting information quality [51]. This ethical
perspective might induce companies to protect stakeholders’ interests by supporting audit
quality [52,53]. In this regard, focusing on Indonesia, Handayati et al. found that firms
audited by Big4 auditors are positively related to CSR disclosure [54]. Focusing on the
French context, Dakhli found that the positive implications of corporate social responsibility
are more obvious in firms audited by Big4 auditors [55]. Using the U.S. data, Sun et al.
found that firms with higher CSR performance are more likely to engage industry specialist
auditors [56]. Using international evidence, Hichri found a positive association between
audit quality and integrated reporting [57]. Using U.S. data, Du et al. found that companies
with higher CSR performance are likely to engage big (high-quality) auditors [52]. Follow-
ing this perspective, we believe that firms with higher ESG performance and reporting are
likely to support higher audit quality by engaging Big4 auditors. Thus, we set the first
hypothesis as follows:

H1. ESG firms are more likely to assign big4 auditors.

Sustainability 2024, 16, 124 4 of 18

2.2. ESG Performance and Audit Opinion

As previously indicated, according to the opportunistic perspective, firms may use
ESG practices to hide some of the negative activities, including reporting irregularities [1,58].
From this stance, it is not anticipated to find a direct association between ESG performance
and receiving an unqualified audit opinion. In this regard, Nguyen and Trinh found a non-
linear influence of CSR on the likelihood of receiving unqualified opinions [59]. However,
several studies in the literature support the ethical perspective of ESG, suggesting its
positive implications for the outcome of the audit process.
According to the ethical perspective, firms committed to ESG practices are likely to be
honest and trustworthy by having a strict code of ethics [57] that, in turn, would restrict
reporting irregularities [60], and instead support transparency of financial reports and
information quality [51,61]. Supporting this view, some studies revealed that firms’ ESG
practices are related to lower misstatement and client business risk [60,62]. Similarly, other
studies indicated that ESG firms are likely to be associated with fewer auditors and analysts
forecasting errors [63], less auditor engagement risk [52], and less litigation risk [9].
This context makes us infer that firms committed to ESG may receive an unqualified
audit opinion. Along with this argument, using evidence from energy firms listed in
Vietnam, Nguyen and Trinh indicated that companies with noticeable CSR activity are
anticipated to get unqualified opinions due to the quality of their financial reports [59].
Wang et al. indicated that firms’ engagement with ESG practices decreases the probability
of receiving a qualified audit opinion [64]. Thus, we set the second hypothesis as follows:

H2. ESG firms are less likely to receive qualified audit reports.

3. Research Design
3.1. Sample and Data Sources
Our sample includes all the firms indexed in EGX100 across the period 2014–2022. We
obtained the firms’ auditors and audit opinion data as well as financial data over the study
period from the firms’ annual reports. Governance data were collected from the companies’
governance reports published by Egypt for Information Dissemination (EGID) Company.
Finally, ESG performance data were collected through the ESG index published by the
Egyptian Stock Exchange across the study period. Table 1 shows the process of sample
selection and sample distribution according to industry.

Table 1. The study sample.

No. of Firms Observations

Panel A: Sample selection
EGX100 across the study period 2014–2022 100 firms 900
(–) Banking and financial firms (22) (198)
(–) Firms with missing financial and governance data (10) (90)
Final sample 68 612
Panel B: Sample distribution
Merchandising 18 2.9%
Manufacturing 495 80.9%
Service 99 16.2%
Total 612 100%

3.2. Research Models

Since the dependent variables (AC and AO) are dichotomous, we analyzed data
depending on binary logistic regression (BLR). The maximum likelihood approach is
used to estimate the model parameters, and an iterative algorithm is used to pick the
Sustainability 2024, 16, 124 5 of 18

coefficients that result in the most “likely” observation outcomes. Following Kurniawati
et al. and Tantawy and Moussa [31,32], we used the following logistic regressions to test
our hypotheses:

ACit = α + B1 ( ESGit ) + B2 ( FSIZEit ) + B3 ( LEVERAGEit ) + B4 ( PROFITABILITY it ) + B5 ( FGROWTH it )

+ B6 ( LOSSit ) + B7 ( FAGEit ) + B8 ( BSIZEit ) + B9 ( BMEETI NGSit ) + B10 ( DU ALITY it )
(1)
+ B11 ( BI NDEPENDENCEit ) + B12 ( ACSIZEit ) + B13 ( ACMEETI NGSit )
+ B14 ( ACI NDEPENDENCEit ) + B15 ( I NDUSTRIES) + B16 (YEARS)

AOit = α + B1 ( ESGit ) + B2 ( FSIZEit ) + B3 ( LEVERAGEit ) + B4 ( PROFITABILITY it ) + B5 ( FGROWTH it )

+ B6 ( LOSSit ) + B7 ( FAGEit ) + B8 ( BSIZEit ) + B9 ( BMEETI NGSit ) + B10 ( DU ALITY it )
(2)
+ B11 ( BI NDEPENDENCEit ) + B12 ( ACSIZEit ) + B13 ( ACMEETI NGSit )
+ B14 ( ACI NDEPENDENCEit ) + B15 ( I NDUSTRIES) + B16 (YEARS)
where ACit is a binary variable showing whether the firm is audited by one of the Big-4
or non-Big-4 auditors. AOit is a binary variable showing whether the auditor has issued
a qualified or unqualified opinion. ESGit is a binary variable showing whether firms are
listed in the EGX index or not.
We follow some literature in controlling for some variables that influence independent
variables, such as firm size, leverage, firm profitability, firm growth, loss, firm age, board
size, board meetings, duality, nonexecutive directors in the board, audit committee size,
meetings and independence, industries, and years [31,32]. All variables used in models (1)
and (2) are reported in Table 2.

Table 2. Variable measurements.

Variables Measurement
A dummy variable assigned 1 for firms audited by a Big-4 audit firm in
AC Auditor choice
the year t, and 0 otherwise.
A dummy variable assigned 1 for firms that received a qualified
AO Audit opinion
opinion in the year t, and 0 otherwise.
A dummy variable assigned 1 for firms listed in the ESG index in the
ESG ESG performance
year t, and 0 otherwise.
FSIZE Firm size The natural logarithm of total assets in year t.
LEVERAGE Financial leverage Total debt over total assets in year t.
Net profit after tax, and extraordinary items in year t,
PROFITABILITY Firm profitability
scaled to total assets.
FGROWTH Firm growth The change in net sales in year t, scaled to revenue in year t − 1.
A dummy variable assigned 1 if the firms have carryforward loss in
LOSS Carryforward loss
year t, and 0 otherwise.
The natural logarithm of the number of years since the firm has been
FAGE Firm age
listed in the Egyptian Exchange.
BSIZE Board size The number of directors on the board in year t.
BMEETINGS Board meetings The number of board meetings in year t.
A dummy variable assigned 1 if the Chairman and CEO are the same
DUALITY Duality
person, and 0 otherwise.
The number of non-executive directors on the board, scaled to its total
BINDEPENDENCE Board independence
number of directors in year t.
ACSIZE Audit committee size The number of members in the audit committee in year t.
ACMEETINGS Audit committee meetings The number of audit committee meetings in year t.
Audit committee The number of non-executive directors in the audit committee, scaled
ACINDEPENDENCE
independence to its total number of directors in year t.
Sustainability 2024, 16, 124 6 of 18

4. Research Results and Discussion

4.1. Descriptive Statistics
Panel A of Table 3 shows descriptive results for the whole sample. The mean values
of AC and AO are 0.327 and 0.413, indicating that 32.7% of firms assign one of the Big4
auditors, and 41.3% of firms receive a qualified audit opinion, which is consistent with
previous studies such as Tantawy and Moussa [32]. The mean value of ESG is 0.240,
indicating that 24% of our sample companies are indexed in the ESG index. Panel B shows
the mean differences and t-tests for firms listed in the ESG index versus non-listed firms.
The findings indicate that the ESG firms are more likely to assign one of the Big4 auditors
and are less likely to receive a qualified audit opinion. These results are significant at the
1% significance level.

Table 3. Descriptive results.

Panel A: Descriptive results for all samples (Full Sample = 612)

Variables Mean Median SD Minimum Maximum
AC 0.327 0.000 0.469 0.000 1.000
AO 0.413 0.000 0.493 0.000 1.000
ESG 0.240 0.000 0.428 0.000 1.000
FSIZE 21.050 21.138 1.728 16.822 25.639
LEVERAGE 0.432 0.433 0.248 0.001 0.986
PROFITABILITY 0.046 0.036 0.086 −0.124 0.225
FGROWTH 0.133 0.080 0.452 −0.848 1.057
LOSS 0.240 0.000 0.426 0.000 1.000
FAGE 2.910 3.044 0.546 0.693 4.080
BSIZE 8.173 8.000 2.797 3.000 16.000
BMEETINGS 10.005 9.000 4.628 2.000 23.000
DUALITY 0.716 1.000 0.451 0.000 1.000
BINDEPENDENCE 0.701 0.750 0.201 0.200 1.000
ACSIZE 3.583 3.000 0.987 2.000 8.000
ACMEETINGS 5.291 4.000 2.678 1.000 14.000
ACINDEPENDENCE 0.934 1.000 0.170 0.000 1.000
Panel B: Univariate analysis (Full Sample = 612)
Firms listed in the ESG index Firms not listed in the ESG index
Variables
(147 observations) (465 observations) t-test Sig.
Mean SD Mean SD
AC 0.646 0.480 0.226 0.419 10.239 0.000 ***
AO 0.211 0.409 0.477 0.500 −5.870 0.000 ***
FSIZE 22.255 1.515 20.669 1.614 10.534 0.000 ***
LEVERAGE 0.401 0.250 0.441 0.247 −1.711 0.088 *
PROFITABILITY 0.071 0.076 0.039 0.087 4.003 0.000 ***
FGROWTH 0.172 0.418 0.121 0.462 1.176 0.240
LOSS 0.068 0.253 0.294 0.455 −5.749 0.000 ***
FAGE 2.715 0.504 2.971 0.545 −5.049 0.000 ***
BSIZE 9.673 2.740 7.699 2.647 7.818 0.000 ***
Sustainability 2024, 16, 124 7 of 18

Table 3. Cont.

Panel B: Univariate analysis (Full Sample = 612)

Firms listed in the ESG index Firms not listed in the ESG index
Variables
(147 observations) (465 observations) t-test Sig.
Mean SD Mean SD
BMEETINGS 10.347 5.140 9.897 4.455 1.028 0.304
DUALITY 0.612 0.489 0.748 0.434 −3.211 0.001 ***
BINDEPENDENCE 0.731 0.157 0.692 0.212 2.058 0.040 **
ACSIZE 3.707 1.218 3.544 0.899 1.753 0.080 *
ACMEETINGS 5.354 2.415 5.271 2.758 0.326 0.744
ACINDEPENDENCE 0.976 0.073 0.921 0.189 3.457 0.001 ***
* is significant at level < 10%, ** is significant at level < 5%, *** is significant at level < 1%. For variable definitions,
see Table 2.

Table 4 presents a Pearson’s correlation matrix for our variables. ESG is positively
(negatively) correlated with AC (AO) at the 1% level, respectively. This result supports the
hypothesis that ESG firms focus more on financial reporting quality. Thus, ESG firms are
more likely to assign one of the Big4 auditors and are less likely to receive a qualified audit
opinion. These findings are consistent with some previous studies such as Gonçalves et al.
and Wang et al. [64,65]. Further, the correlation matrix shows that independent variables
are correlated below 0.5, which indicates that the multi-collinearity problem is non-existent.

4.2. Logistic Regression Results

We estimate models (1) and (2) depending on the binary logistic regression (BLR)
method. The BLR models have met the requirements of the goodness of fit to predict
AC and AO based on ESG performance, as presented in Table 5, panels A, B, and C. The
omnibus test results presented in panel A show that the ESG affects the AC and AO, as the
chi-squared value of the omnibus test is significant at the 1% level for both models. This
indicates that the independent variables in our models have a significant effect on both AC
and AO. Thus, the BLR models are fitted to predict the relation between the dependent and
independent variables.
To ensure that the models are fitted with the observation data, we depend on the
Hosmer–Lemeshow tests which are required in BLR analysis. Panel B reveals chi-squared
values of 9.455 and 11.310 with a significance of 0.305 and 0.185 for models (1) and (2),
respectively. These values are greater than the alpha value of 0.05, indicating that the BLR
models are fitted with our data, and, hence, our models can predict the relation between
ESG, AC, and AO from the existing data.
The ability of ESG, in total, to illustrate the variances in AC and AO variables in the
BLR models was tested using Nagelkerke R2 presented in Panel C. The Nagelkerke R2
values are 0.464, and 0.384 for models (1) and (2), respectively, indicating that 46.4% of the
variance in AC and 38.4% of the variance in AO could be explained by ESG or independent
variables in our models. Overall, the results show that BLR models can significantly predict
the relation between ESG, AC, and AO.
Sustainability 2024, 16, 124 8 of 18

Table 4. Correlation matrix.

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1-AC 1.000
2-AO −0.380 *** 1.000
3-ESG 0.383 *** −0.231 *** 1.000
4-FSIZE 0.337 *** −0.082 ** 0.392 *** 1.000
5-LEVERAGE −0.055 0.175 *** −0.069 * 0.036 1.000
6-PROFITABILITY 0.072 * −0.093 ** 0.160 *** 0.272 *** −0.305 *** 1.000
7-FGROWTH 0.006 −0.048 0.048 0.090 ** 0.042 0.135 *** 1.000
8-LOSS −0.163 *** 0.229 *** −0.227 *** −0.349 *** 0.319 *** −0.478 *** 0.037 1.000
9-FAGE −0.256 *** 0.179 *** −0.200 *** −0.007 0.271 *** −0.103 ** 0.022 0.147 *** 1.000
10-BSIZE 0.140 *** −0.118 *** 0.302 *** 0.414 *** −0.116 *** 0.249 *** 0.014 −0.093 ** −0.074 1.000
11-BMEETINGS −0.093 ** 0.246 *** 0.042 0.167 *** 0.126 *** 0.191 *** 0.028 −0.089 ** −0.039 0.138 *** 1.000
12-DUALITY −0.240 *** 0.191 *** −0.129 *** −0.093 ** −0.028 0.016 −0.006 0.074 * 0.004 0.017 0.202 *** 1.000
13-BINDEPENDENCE 0.197 *** −0.289 *** 0.083 ** 0.060 −0.211 *** 0.045 −0.021 0.014 −0.154 *** 0.379 *** −0.096 ** −0.269 *** 1.000
14-ACSIZE −0.055 0.180 *** 0.071 * 0.158 *** −0.035 0.171 *** 0.028 −0.025 0.111 *** 0.273 *** 0.267 *** 0.164 *** 0.013 1.000
15-ACMEETINGS −0.097 ** 0.313 *** 0.013 0.013 0.067 * −0.008 0.039 0.114 *** 0.142 *** 0.049 0.404 *** 0.108 *** −0.233 *** 0.401 *** 1.000
16-
0.197 *** −0.187 *** 0.139 *** 0.035 −0.065 0.062 −0.016 0.005 0.006 0.175 *** −0.099 ** −0.227 *** 0.289 *** −0.184 *** −0.186 *** 1.000
ACINDEPENDENCE
* is significant at level < 10%, ** is significant at level < 5%, *** is significant at level < 1%.
Sustainability 2024, 16, 124 9 of 18

Table 5. Testing the research hypotheses.

Panel A: Omnibus Test of Model Coefficients

Model (1): Auditor Choice Model (2): Audit Opinion
Step 1 Chi-square D.f. Sig. Chi-square D.f. Sig.
Step 247.868 24 0.000 205.309 24 0.000
Block 247.868 24 0.000 205.309 24 0.000
Model 247.868 24 0.000 205.309 24 0.000
Panel B: Hosmer–Lemeshow’s goodness-of-fit test
Model (1): Auditor Choice Model (2): Audit opinion
Chi-square D.f. Sig. Chi-square D.f. Sig.
Step 1 9.455 8 0.305 11.310 8 0.185
Panel C: Nagelkerke R2 square test
Model (1): Auditor Choice Model (2): Audit opinion
−2 Log Cox and Cox and
Nagelkerke R2 −2 Log likelihood Nagelkerke R2
likelihood Snell R2 Snell R2
Step 1 525.563 0.333 0.464 624.651 0.285 0.384
Panel D: Wald test
Model (1): Auditor Choice Model (2): Audit opinion
Variables 95% C.I. for Exp (B) 95% C.I. for Exp (B)
B (Wald) Exp (B) B (Wald) Exp (B)
Lower Upper Lower Upper
Step1 1.127 *** −1.083 ***
3.088 1.795 5.311 0.339 0.193 0.595
ESG (16.604) (14.193)
0.604 *** 0.005
FSIZE 1.830 1.529 2.191 1.005 0.860 1.174
(43.296) (0.003)
0.279 0.512
LEVERAGE 1.322 0.425 4.112 1.669 0.596 4.673
(0.233) (0.952)
−0.111 0.643
PROFITABILITY 0.895 0.038 21.242 1.903 0.108 33.360
(0.005) (0.194)
0.050 −0.497 **
FGROWTH 1.051 0.632 1.748 0.608 0.381 0.972
(0.036) (4.330)
−0.153 1.374 ***
LOSS 0.858 0.438 1.680 3.952 2.213 7.057
(0.200) (21.576)
−1.005 *** 0.436 **
FAGE 0.366 0.235 0.569 1.547 1.033 2.314
(19.871) (4.494)
−0.122 ** −0.036
BSIZE 0.885 0.805 0.974 0.964 0.879 1.058
(6.316) (0.594)
−0.092 *** 0.094 ***
BMEETINGS 0.912 0.864 0.963 1.098 1.047 1.152
(10.972) (14.524)
−0.530 ** 0.229
DUALITY 0.588 0.356 0.973 1.257 0.775 2.040
(4.273) (0.859)
2.712 *** −2.587 ***
BINDEPENDENCE 15.057 3.272 69.294 0.075 0.021 0.270
(12.124) (15.724)
0.047 0.234 **
ACSIZE 1.048 0.804 1.365 1.263 1.003 1.591
(0.120) (3.952)
0.003 0.162 ***
ACMEETINGS 1.003 0.893 1.126 1.176 1.063 1.302
(0.002) (9.846)
3.243 *** −1.172 *
ACINDEPENDENCE 25.606 2.287 286.661 0.310 0.096 1.005
(6.924) (3.810)
−14.810 *** −1.394
Constant 0.000 0.248
(33.728) (0.534)
Years Effect Included Included
Industries Effect Included Included
Observations 612 612
* is significant at level < 10%, ** is significant at level < 5%, *** is significant at level < 1%.
Sustainability 2024, 16, 124 10 of 18

Panel D confirms the effect of independent variables individually on AC and AO.

The coefficient value of ESG in model (1) is positive (1.127) and significant at the 1% level,
meaning that the ESG firms tend to assign one of the Big4 auditors. Therefore, we accept
H1. This result is consistent with the view that ESG firms are more likely to demand higher
audit quality to enhance financial reporting quality [65–67]. Model (1) also presents the
probability of ESG firms assigning Big4 auditors. The Exp (B) for firms indexed in the
ESG index is 3.088. This finding implies that the likelihood of ESG firms assigning one of
the Big4 auditors is 3.088 times higher than that of other firms. However, the coefficient
value of the ESG in model (2) is negative (−1.083) and significant at the 1% level. This
finding means that ESG firms are less likely to receive a qualified audit opinion or they
are more likely to receive an unqualified audit opinion. This result ensures that a sound
ESG performance improves financial reporting quality, which consequently reduces the
likelihood of issuing a qualified opinion [59,64,65]. Therefore, we accept H2. Model (2)
also presents the probability of ESG firms receiving a qualified audit opinion. The Exp
(B) for firms indexed in the ESG index is 0.339. This finding suggests that ESG firms are
0.661 times less likely to receive a qualified audit opinion than other firms.

4.3. Robustness Tests

To ensure the robustness of our main results, we first addressed the concerns of the
potential simultaneity by re-estimating models (1) and (2) by including a one-year lag for
independent and control variables [32]. By doing so, we allow time for the effects of ESG
on AC and AO to be discerned. The results reported in Table 6 are consistent with those
presented in Table 5. Panel D shows that the coefficient value of the lagged ESG in model
(1) is positive (0.829) and significant at the 1% level, meaning that the ESG firms tend to
assign one of the Big4 auditors in the next year. The Exp (B) for firms indexed in the ESG
index is 2.292, suggesting that the ESG firms are 2.292 times more likely to assign one of
the Big4 auditors than other firms. However, the coefficient value of ESG in model (2) is
negative (−1.102), and significant at the 1% level, meaning that the ESG firms are less likely
to receive a qualified audit opinion in the subsequent year. Model (2) also presents the
probability of ESG firms receiving a qualified audit opinion, where the Exp (B) for firms
indexed in the ESG index is 0.332. This finding implies that ESG firms are 0.668 times less
likely to receive a qualified audit opinion in the subsequent year than other firms.
We addressed the potential endogeneity problems using instrumental variables (IVs).
We followed previous research by employing two IVs to predict ESG in addition to control
variables (e.g., [57,68]). The first IV is the average ESG in the industry because the firm-level
ESG is closely related to industry norms, and the second IV is two years lagged ESG at the
firm level. The results reported in Table 7 are consistent with those presented in Table 5.
Panel D reveals that the coefficient value of the predicted ESG in model (1) is positive
(0.555) and significant at the 5% level, meaning that the ESG firms tend to assign one of the
Big4 auditors. The Exp (B) for firms indexed in the ESG index is 1.741, indicating that the
ESG firms are 1.741 times more likely to assign one of the Big4 auditors than other firms.
However, the coefficient value of the ESG in model (2) is negative (−0.942) and significant
at the 1% level, meaning that the ESG firms are less likely to receive a qualified audit
opinion. Model (2) also presents the probability of ESG firms receiving a qualified audit
opinion, where the Exp (B) for firms indexed in the ESG index is 0.390. This ensures that the
ESG firms are 0.61 times less likely to receive a qualified audit opinion than other firms.
Sustainability 2024, 16, 124 11 of 18

Table 6. Robustness tests using lagged ESG.

Panel A: Omnibus Test of Model Coefficients

Model (1): Auditor Choice Model (2): Audit Opinion
Step 1 Chi-square D.f. Sig. Chi-square D.f. Sig.
Step 240.272 24 0.000 205.629 24 0.000
Block 240.272 24 0.000 205.629 24 0.000
Model 240.272 24 0.000 205.629 24 0.000
Panel B: Hosmer–Lemeshow’s goodness-of-fit test
Model (1): Auditor Choice Model (2): Audit opinion
Chi-square D.f. Sig. Chi-square D.f. Sig.
Step 1 10.690 8 0.220 9.134 8 0.331
Panel C: Nagelkerke R2 square test
Model (1): Auditor Choice Model (2): Audit opinion
−2 Log Cox and −2 Log Cox and
Nagelkerke R2 Nagelkerke R2
likelihood Snell R2 likelihood Snell R2
Step 1 533.158 0.325 0.453 624.330 0.285 0.384
Panel D: Wald test
Model (1): Auditor Choice Model (2): Audit opinion
Variables 95% C.I. for Exp (B) 95% C.I. for Exp (B)
B (Wald) Exp (B) B (Wald) Exp (B)
Lower Upper Lower Upper
Step 1 0.829 *** −1.102 ***
2.292 1.347 3.899 0.332 0.188 0.587
Lagged ESG (9.348) (14.394)
0.622 *** 0.003
FSIZE 1.863 1.557 2.229 1.003 0.859 1.171
(46.301) (0.001)
0.242 0.499
LEVERAGE 1.274 0.416 3.904 1.648 0.589 4.612
(0.179) (0.904)
0.222 0.379
PROFITABILITY 1.249 0.053 29.531 1.461 0.081 26.356
(0.019) (0.066)
0.064 −0.485 **
FGROWTH 1.066 0.645 1.762 0.616 0.386 0.983
(0.062) (4.123)
−0.145 1.340 ***
LOSS 0.865 0.443 1.689 3.820 2.138 6.826
(0.181) (20.478)
−1.073 *** 0.444 **
FAGE 0.342 0.220 0.531 1.559 1.044 2.330
(22.910) (4.700)
−0.112 ** −0.036
BSIZE 0.894 0.813 0.983 0.964 0.879 1.058
(5.381) (0.593)
−0.095 *** 0.095 ***
BMEETINGS 0.910 0.862 0.960 1.099 1.047 1.154
(11.821) (14.699)
−0.554 ** 0.228
DUALITY 0.574 0.349 0.944 1.256 0.774 2.040
(4.775) (0.852)
2.533 *** −2.555 ***
BINDEPENDENCE 12.596 2.787 56.921 0.078 0.022 0.279
(10.837) (15.378)
0.057 0.233 **
ACSIZE 1.058 0.812 1.380 1.262 1.002 1.590
(0.176) (3.909)
0.008 0.162 ***
ACMEETINGS 1.008 0.899 1.131 1.176 1.062 1.301
(0.020) (9.716)
3.467 *** −1.155 *
ACINDEPENDENCE 32.055 2.683 383.043 0.315 0.097 1.022
(7.505) (3.699)
−15.078 *** −1.396
Constant 0.000 0.248
(34.490) (0.539)
Years Effect Included Included
Industries Effect Included Included
Observations 612 612
* is significant at level < 10%, ** is significant at level < 5%, *** is significant at level < 1%.
Sustainability 2024, 16, 124 12 of 18

Table 7. Robustness tests using predicted ESG.

Panel A: Omnibus Test of Model Coefficients

Model (1): Auditor Choice Model (2): Audit Opinion
Chi-
Step 1 Chi-Square D.f. Sig. D.f. Sig.
Square
Step 234.705 24 0.000 200.570 24 0.000
Block 234.705 24 0.000 200.570 24 0.000
Model 234.705 24 0.000 200.570 24 0.000
Panel B: Hosmer–Lemeshow’s goodness-of-fit test
Model (1): Auditor Choice Model (2): Audit opinion
Chi-square D.f. Sig. Chi-square D.f. Sig.
Step 1 14.397 8 0.072 14.507 8 0.069
Panel C: Nagelkerke R2 square test
Model (1): Auditor Choice Model (2): Audit opinion
−2 Log Cox and −2 Log Cox and
Nagelkerke R2 Nagelkerke R2
likelihood Snell R2 likelihood Snell R2
Step 1 538.725 0.319 0.444 629.390 0.279 0.376
Panel D: Wald test
Model (1): Auditor Choice Model (2): Audit opinion
Variables 95% C.I. for Exp (B) 95% C.I. for Exp (B)
B (Wald) Exp (B) B (Wald) Exp (B)
Lower Upper Lower Upper
Step1 0.555 ** −0.942 ***
1.741 1.002 3.027 0.390 0.216 0.702
Predicted ESG (3.863) (9.836)
0.642 *** −0.001
FSIZE 1.899 1.586 2.274 0.999 0.855 1.168
(48.771) (0.000)
0.202 0.503
LEVERAGE 1.223 0.404 3.700 1.653 0.594 4.602
(0.127) (0.927)
0.200 0.525
PROFITABILITY 1.221 0.051 29.326 1.691 0.096 29.644
(0.015) (0.129)
0.061 −0.487 **
FGROWTH 1.062 0.644 1.753 0.615 0.385 0.981
(0.056) (4.166)
−0.193 1.381 ***
LOSS 0.825 0.425 1.599 3.978 2.233 7.088
(0.326) (21.948)
−1.122 *** 0.456 **
FAGE 0.326 0.210 0.506 1.577 1.056 2.356
(24.906) (4.959)
−0.111 ** −0.036
BSIZE 0.895 0.812 0.985 0.965 0.880 1.058
(5.162) (0.574)
−0.096 *** 0.095 ***
BMEETINGS 0.908 0.861 0.959 1.099 1.048 1.153
(12.270) (15.012)
−0.560 ** 0.204
DUALITY 0.571 0.347 0.939 1.226 0.754 1.996
(4.876) (0.676)
2.524 *** −2.588 ***
BINDEPENDENCE 12.473 2.753 56.510 0.075 0.021 0.269
(10.717) (15.854)
0.069 0.231 **
ACSIZE 1.071 0.821 1.398 1.260 1.001 1.586
(0.257) (3.861)
0.010 0.160 ***
ACMEETINGS 1.010 0.901 1.133 1.174 1.061 1.299
(0.029) (9.637)
3.693 *** −1.217 **
ACINDEPENDENCE 40.145 3.182 506.489 0.296 0.091 0.958
(8.151) (4.124)
−15.409 *** −1.364
Constant 0.000 0.256
(35.122) (0.507)
Years Effect Included Included
Industries Effect Included Included
Observations 612 612
** is significant at level < 5%, *** is significant at level < 1%.
Sustainability 2024, 16, 124 13 of 18

We re-ran the models depending on logistic regression using cluster robust standard
error method, where observations are clustered by firm. This method leads to significantly
more accurate inference in finance panels [69]. The results in Table 8 are consistent with
those presented in Tables 5–7. The results confirm the view that ESG firms are more likely
to assign one of the Big4 auditors and less likely to receive a qualified opinion.

Table 8. Logistic regression using the cluster robust standard error method.

Model (1): Auditor Choice Model (2): Audit Opinion

1.13 *** −1.08 ***
ESG
(4.18) (−3.87)
0.60 *** 0.0046
FSize
(7.11) (0.060)
0.28 0.51
Leverage
(0.46) (1.03)
−0.11 0.64
Profitability
(−0.082) (0.45)
0.050 −0.50 **
FGrowth
(0.21) (−2.17)
−0.15 1.37 ***
LOSS
(−0.48) (4.40)
−1.00 *** 0.44 **
FAge
(−4.50) (2.12)
−0.12 *** −0.036
BSIZE
(−2.69) (−0.80)
−0.092 *** 0.094 ***
BMEETINGS
(−3.25) (3.88)
−0.53 ** 0.230
DUALITY
(−2.04) (0.92)
2.71 *** −2.59 ***
BINDEPENDENCE
(3.63) (−4.00)
0.047 0.230 **
ACSIZE
(0.37) (2.04)
0.0027 0.16 ***
ACMEETINGS
(0.053) (3.34)
3.24 *** −1.17 **
ACINDEPENDENCE
(3.53) (−2.00)
−13.0 *** −0.97
Constant
(−6.44) (−0.51)
Years Effect Included Included
Industries Effect Included Included
N 594 612
Pseudo R2 0.3075 0.2474
** is significant at level < 5%, *** is significant at level < 1%.

4.4. Additional Analysis: ESG Performance, Auditor Choice, and Audit Opinion
during COVID-19
Previous literature refers to the implications of COVID-19 on financial reporting
quality and auditing outcomes [70]. For further insights in this regard, we examined the
probable effect of COVID-19 on our hypotheses by adding COVID-19 as a moderator in
our models. The results shown in Table 9 are consistent with those presented in Table 5,
suggesting that COVID-19 has a significant negative effect on AC (at the 1% level) and an
Sustainability 2024, 16, 124 14 of 18

insignificant negative effect on AO. The results also reveal an increase in the likelihood of
ESG firms assigning one of the Big4 auditors during COVID-19 as the coefficient value of
COVID-19*ESG is 1.027 in model (1), and this result is significant at the 5% level. However,
the results suggest an increase in the likelihood of ESG firms receiving a qualified audit
opinion during COVID-19, as the coefficient value of COVID-19*ESG is 1.055 in model
(2), and this result is significant at the 5% level. These results are consistent with Hsu
and Yang, who found a decrease in UK companies’ financial reporting quality during the
pandemic [70].

Table 9. Testing the research hypotheses during COVID-19.

Panel A: Omnibus Test of Model Coefficients

Model (1): Auditor Choice Model (2): Audit Opinion
Chi-
Step 1 Chi-Square D.f. Sig. D.f. Sig.
Square
Step 249.064 18 0.000 204.980 18 0.000
Block 249.064 18 0.000 204.980 18 0.000
Model 249.064 18 0.000 204.980 18 0.000
Panel B: Hosmer–Lemeshow’s goodness-of-fit test
Model (1): Auditor Choice Model (2): Audit opinion
Chi-square D.f. Sig. Chi-square D.f. Sig.
Step 1 11.073 8 0.198 7.290 8 0.506
Panel C: Nagelkerke R2 square test
Model (1): Auditor Choice Model (2): Audit opinion
−2 Log Cox and −2 Log Cox and
Nagelkerke R2 Nagelkerke R2
likelihood Snell R2 likelihood Snell R2
Step 1 524.366 0.334 0.466 624.980 0.285 0.383
Panel D: Wald test
Model (1): Auditor Choice Model (2): Audit opinion
Variables 95% C.I. for Exp (B) 95% C.I. for Exp (B)
B (Wald) Exp (B) B (Wald) Exp (B)
Lower Upper Lower Upper
Step 1 0.830 *** −1.483 ***
2.292 1.232 4.265 0.227 0.110 0.467
ESG (6.858) (16.263)
−1.634 *** −0.078
COVID-19 0.195 0.099 0.384 0.925 0.580 1.476
(22.300) (0.107)
1.027 ** 1.055 **
COVID-19*ESG 2.793 0.968 8.054 2.871 1.028 8.017
(3.612) (4.050)
0.586 *** −0.019
FSIZE 1.797 1.503 2.148 0.981 0.841 1.144
(41.363) (0.061)
0.277 0.448
LEVERAGE 1.319 0.423 4.113 1.566 0.564 4.348
(0.228) (0.741)
−0.255 0.198
PROFITABILITY 0.775 0.035 17.348 1.219 0.074 20.176
(0.026) (0.019)
−0.004 −0.510 **
FGROWTH 0.996 0.607 1.633 0.601 0.381 0.946
(0.000) (4.840)
−0.140 1.342 ***
LOSS 0.869 0.445 1.699 3.825 2.152 6.799
(0.168) (20.901)
−1.014 *** 0.401 **
FAGE 0.363 0.234 0.562 1.493 1.004 2.220
(20.568) (3.922)
−0.114 ** −0.028
BSIZE 0.892 0.812 0.981 0.973 0.887 1.066
(5.604) (0.353)
−0.089 *** 0.097 ***
BMEETINGS 0.914 0.866 0.965 1.101 1.049 1.156
(10.523) (15.360)
Sustainability 2024, 16, 124 15 of 18

Table 9. Cont.

Panel D: Wald test

Model (1): Auditor Choice Model (2): Audit opinion
Variables 95% C.I. for Exp (B) 95% C.I. for Exp (B)
B (Wald) Exp (B) B (Wald) Exp (B)
Lower Upper Lower Upper
−0.569 ** 0.187
DUALITY 0.566 0.342 0.936 1.206 0.743 1.958
(4.915) (0.573)
2.675 *** −2.668 ***
BINDEPENDENCE 14.508 3.159 66.632 0.069 0.019 0.250
(11.825) (16.678)
0.025 0.225 *
ACSIZE 1.026 0.789 1.333 1.252 0.994 1.578
(0.036) (3.638)
0.013 0.171 ***
ACMEETINGS 1.013 0.903 1.137 1.186 1.071 1.314
(0.048) (10.665)
3.215 *** −1.176 **
ACINDEPENDENCE 24.908 2.226 278.652 0.308 0.095 0.996
(6.810) (3.866)
−12.787 *** −0.592
Constant 0.000 0.553
(28.086) (0.106)
Years Effect Not included Not included
Industries Effect Included Included
Observations 612 612
* is significant at level < 10%, ** is significant at level < 5%, *** is significant at level < 1%.

5. Conclusions
This study has examined the relationship between ESG performance, auditor choice,
and audit opinion. There are two arguments in this regard. The first one indicates that
firms with higher ESG performance will be more ethical, and motivated to demand higher
audit quality through assigning one of the Big4 auditors to provide transparent information
to the stakeholders. On the contrary, firms may engage in ESG activities to conceal their
misbehaviors. Consequently, the real intention of ESG performance, under this argument,
is to mislead stakeholders with opportunistic behaviors, negatively influencing financial
reporting. Then, ESG firms are less likely to demand higher audit quality. In addition, we
examined the relation between ESG performance and audit opinion. To test our hypotheses,
we used a sample of listed firms on EGX100 during the period 2014–2022. The results
revealed that higher ESG performance firms are more likely to assign one of the Big4
auditors. These results are consistent with the view that firms with higher ESG performance
are more likely to demand higher audit quality to enhance financial reporting quality [65,67].
In addition, our results indicated that higher ESG performance firms are more likely to have
an unqualified audit opinion. This is consistent with the view that auditors in these firms
are less likely to issue a qualified opinion, which ensures that ESG performance improves
financial reporting quality [59,64,65]. Moreover, as an additional analysis, we examined the
effect of COVID-19 on our results. The results showed an increase in the likelihood of ESG
firms assigning one of the Big4 auditors during COVID-19. However, COVID-19 increases
the likelihood of ESG firms receiving a qualified audit opinion, which is consistent with
Hsu and Yang who reported a decrease in financial reporting quality during the pandemic
period [70].
Our study contributes to the literature as the first study that examines the relationships
between ESG, AC, and AO in Egypt and considers the effect of COVID-19 on these rela-
tionships. Our results support the ethical perspective of ESG firms in Egypt. The current
findings provide significant evidence to policymakers, auditors, and investors in emerging
markets. They can guide policymakers in formulating guidelines and regulations to better
oversee firms, enhance governance, and protect stakeholders’ interests, especially during
crises. Further, the current findings advise investors to consider ESG performance while
making investment decisions, especially during crisis time.
Sustainability 2024, 16, 124 16 of 18

However, this study is not without limitations. Some variables that may affect ESG
performance, such as ownership concentration, political connections, and institutional
ownership, were not examined in our study. Future research may consider these governance
variables for new insights concerning the ESG–audit practices relationship. Considering
the focus of this study on the Egyptian market, we suggest that future research could
reinvestigate the relationship between ESG performance, AC, and AO in other countries
with different cultural and institutional contexts. Further, employing qualitative research
methods such as case studies and interviews in future research may add further insights
concerning the implications of ESG for the auditors’ decisions during different audit phases.

Author Contributions: Conceptualization, A.D.; Methodology, A.M.E.; Writing—original draft,

A.M.E.; Writing—review & editing, A.D.; Project administration, A.M.E. All authors have read and
agreed to the published version of the manuscript.
Funding: This research received no external funding.
Informed Consent Statement: Not applicable.
Data Availability Statement: The data presented in this study are available on request from the
corresponding author.
Acknowledgments: The authors would like to thank Prince Sultan University for their support.
Conflicts of Interest: The authors declare no conflict of interest.

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