Audit Quality Determinants in Highly Regulated Financial Industries

Abstract

This research investigates the determinants of audit quality within highly regulated financial industries, moving beyond traditional compliance-centric models
to propose a novel, dynamic framework. While existing literature predominantly
focuses on auditor independence, technical competence, and regulatory adherence,
this study introduces the concept of ’Regulatory Intelligence Quotient’ (RIQ) as
a critical, yet previously unquantified, determinant. RIQ encompasses an audit
firm’s systemic capacity to not only interpret complex, evolving regulations but
to anticipate regulatory shifts and integrate this foresight into audit planning and
execution. The methodology employs a mixed-methods approach, combining a
longitudinal analysis of audit outcomes in the banking, insurance, and securities
sectors from 2015 to 2023 with qualitative insights derived from in-depth interviews with Chief Audit Executives, regulators, and fintech innovators. We develop
and validate a multi-dimensional RIQ index, measuring components such as predictive regulatory analytics adoption, cross-jurisdictional rule synthesis capability, and
proactive engagement with regulatory sandboxes. Our results reveal a strong, statistically significant positive correlation between an audit firm’s RIQ score and key
quality proxies, including audit report lag reduction, lower incidence of post-audit
regulatory findings, and enhanced predictive value of audit opinions for financial
stability. Crucially, the study finds that technological integration—specifically the
use of AI for continuous regulatory monitoring and blockchain for immutable audit
trail verification—acts as a powerful moderator, amplifying the effect of traditional
determinants like experience and size. The paper concludes that in hyper-regulated
environments, audit quality is increasingly defined by adaptive, anticipatory capabilities rather than static compliance, necessitating a paradigm shift in how audit
firms are evaluated and how audit quality is conceptualized and assured.