External Audit Quality, Corporate Governance and ESG Disclosure Credibility: Moderating Evidence from Listed Firms in Sub-Saharan Africa
This study of 157 listed firms in Sub-Saharan Africa finds that neither corporate governance nor external audit quality significantly enhances the credibility of ESG disclosures, a result attributed to institutional voids and regulatory enforcement gaps that lead to decoupling between formal compliance and substantive reporting.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the modern business world, companies are increasingly asked to do more than just report their profits. They are expected to reveal how they treat the environment, how they manage their employees, and how they contribute to society. This collection of non-financial information is known as ESG reporting, standing for Environmental, Social, and Governance. For investors and the public, these reports are meant to be a window into a company's true character and long-term health. However, a significant problem has emerged: just because a company writes a long report does not mean the information inside is trustworthy. Companies might highlight their best moments while hiding their failures, or they might change their stories from year to year to look better than they are. This gap between what a company promises and what it actually does is called a credibility gap. To fix this, many believe that strong internal rules, known as corporate governance, and careful checks by outside auditors should act as a shield, ensuring that what is written on the page matches reality.
A team of researchers set out to test whether these shields actually work in Sub-Saharan Africa. They focused on listed companies in four of the region's most active financial markets: Ghana, Kenya, Nigeria, and South Africa. The researchers gathered a massive amount of data by hand, reading through thousands of annual and sustainability reports from 157 different firms over a ten-year period, from 2015 to 2024. They did not just count how many words the companies wrote; instead, they built a specific score to measure credibility. This score looked at three things: how broad the reporting was, whether the company balanced its environmental, social, and economic stories equally, and whether the company told a consistent story from one year to the next without erratic changes. They then compared these credibility scores against the strength of the companies' internal governance structures and the reputation of the external auditors who checked their work.
The results of this investigation were surprising and challenged a common assumption. The researchers found that having a strong internal governance structure did not automatically lead to more credible ESG reports. While companies with better governance rules tended to write more, the quality and trustworthiness of what they wrote did not significantly improve. In fact, the statistical link between good governance and credible reporting was so weak that it could not be distinguished from random chance. This suggests that in these specific markets, companies may be adopting formal governance rules to look legitimate to investors, without those rules actually changing how they report their sustainability efforts. The internal checks and balances that are supposed to stop managers from exaggerating their green credentials appear to be ineffective in this context.
The study also looked at the role of external auditors, specifically the large, well-known international firms often called the Big Four. The idea was that these auditors might act as a second layer of protection, reinforcing the work of the internal board and ensuring that the sustainability reports were honest. The researchers tested whether companies audited by these top firms had more credible reports than those audited by smaller, local firms. The data showed no such benefit. The presence of a prestigious external auditor did not make the governance rules work better, nor did it independently boost the credibility of the reports. The relationship between internal governance and external auditing, which works well in some parts of the world, did not function as a complementary team in Sub-Saharan Africa.
Instead of finding a clear path to better reporting, the study pointed toward a deeper issue known as an institutional void. This concept describes a situation where the formal rules exist on paper, but the systems needed to enforce them are missing or weak. In the markets studied, companies may follow the letter of the law to satisfy listing requirements, but without strong regulatory enforcement or a culture of genuine accountability, these rules become a formality rather than a tool for truth. The researchers noted that factors outside the company, such as economic inflation or rapid changes in GDP growth, had a stronger influence on the quality of reporting than the internal rules did. When the economy was volatile, companies seemed to deprioritize the consistency and balance of their sustainability stories, focusing instead on immediate financial survival.
The implications of these findings are significant for anyone watching these markets. It suggests that simply encouraging companies to adopt better governance codes or hiring famous auditors will not, by itself, solve the problem of misleading sustainability reports. The study indicates that the credibility of ESG disclosures in this region depends less on the brand name of the auditor or the number of independent directors on a board, and more on the broader environment in which those companies operate. Until there is a stronger infrastructure for enforcing these standards and verifying the claims companies make, the reports may remain voluminous but lack the deep credibility that investors and the public need to trust them. The path forward requires looking beyond the formal structures to the actual mechanisms that ensure a company's words match its actions.
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