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Abstract

The present study aims to examine the effect of external audit quality on the financial distress risk of non-financial listed companies in Iraq, especially the role of liquidity management as a mediator. The research uses panel regression analysis and the Sobel test based on panel data of 65 companies from 2014 to 2024 (715 firm-year observations). Altman's Z-Score is used to measure financial distress risk, the external audit quality is measured by a Big Four auditor dummy, and the liquidity management is measured by the current ratio. The results indicate that the quality of external audit has a significant positive impact on the liquidity management of the firm, and the financial distress risk is significantly negatively affected by external audit quality. Moreover, financial distress risk (beta = 0.355, p < .01) is significantly lower in the presence of liquidity management. Importantly, the study uncovers that the external audit quality-financial distress risk relationship is partially mediated by liquidity management (indirect effect = 0.089775, Sobel Z = 3.52, p < .001). The findings highlight how high-quality external audits can help to ensure financial stability, not only by improving transparency and credibility, but also by encouraging better liquidity management. The study makes theoretical contributions by extending the Agency Theory and provides implications for company directors, stockholders, creditors, supervisors, and policymakers in the area of improving business governance and financial stability in emerging markets.

Keywords

External audit quality, Financial distress risk, Liquidity management, Mediation, Iraqi stock exchange, Emerging markets, Altman Z-Score

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