Evidence on the Impact of Audit-Firm Portfolio Characteristics on Client Financial Reporting Quality
Sofie Van der Meulen
Tilburg University - Department of Accounting & Accountancy
Katholieke Universiteit Leuven (KUL)
Department of Applied Economics KU Leuven Working Paper
The aim of this study is to test the impact of some new measures of expected future audit-firm losses on client financial reporting quality. In prior studies audit-firm size has been used as a proxy for expected future audit-firm losses and hence - following DeAngelo's (1981) argument's - for audit quality. In particular, a big 6 indicator variable has been tested empirically against various measures of client financial reporting quality. This is however a very rough measure that does not distinguish between the likelihood and the size of future audit-firm losses. In this study, we define and measure various audit-firm portfolio characteristics that relate to both the likelihood as well as the size of future audit-firm losses. We find, for a large sample of Belgian companies, that audit-firm portfolio characteristics better explain variations in client financial reporting quality than the traditionally used big 6 indicator variable. In particular, we find that - ceteris paribus - client financial reporting quality is positively associated with the incumbent auditor's percentage of distressed audit clients and the size characteristics of its audit client portfolio.
Number of Pages in PDF File: 31
Keywords: audit-firm portfolio characteristics, financial reporting quality, factor analysis
JEL Classification: M41, M49
Date posted: October 20, 2003
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