Audit quality and digitalisation in shaping firm innovation strategy: Evidence from China

Abstract

This study explores how external auditor quality and internal corporate digitalisation influenced the innovation performance of Chinese listed companies from 2001 to 2021. Innovation is assessed across three dimensions: efficiency, technological impact and economic value. The findings reveal a nuanced relationship: while high-quality audits enhance financial transparency and encourage structured innovation, they can unintentionally stifle high-risk, high-reward technological breakthroughs. Digitalisation amplifies these dynamics, driving data-informed decision-making and operational efficiency but, at times, reinforcing cautious innovation strategies. Further, the interplay between audit quality and digitalisation is shaped by internal factors, such as firm ownership, and external influences, including local enforcement of intellectual property rights and industry competition. These contextual elements amplify or mitigate the effects on innovation outcomes. The study highlights the critical need to balance the benefits of audit rigour and digital transformation with the flexibility required for disruptive innovations. By shedding light on these dynamics, this study offers actionable insights for auditors, corporate leaders and policymakers, aiming to foster an innovation ecosystem that combines financial accountability with bold technological advancements.