ETHICAL LEADERSHIP, FINANCIAL CAPABILITY AND AUDIT EFFECTIVENESS: THE MEDIATING ROLE OF ENTREPRENEURIAL ORIENTATION IN SMEs

Abstract

This study investigates that how ethical leadership, financial management capability, and internal audit effectiveness shape competitive advantage in SMEs, and examines the mediating role of entrepreneurial orientation. A quantitative cross-sectional survey was administered to SMEs across Punjab, Pakistan covering major manufacturing clusters in sectors such as textiles, glass, light engineering & sports goods. Primary data from 400 respondents were collected using a structured questionnaire adapted from validated scales. The model was tested via structural equation modeling (SEM). Results show that ethical leadership, financial management capability and internal audit effectiveness each have significant positive effects upon competitive advantage. Entrepreneurial orientation mediates these links by translating ethical governance and financial discipline into proactive, innovative market actions. SME leaders should reinforce ethical leadership, strengthen financial systems, and ensure effective internal audits, while nurturing the entrepreneurial orientation to adapt organization capabilities to sustained competitive advantage. The study presents the befitting model integrating finance, ethical leadership, auditing, and entrepreneurship to explain the competitive advantage.