The Effect of Size and Type of Auditor on Audit Quality

International Research Journal of Finance and Economics, No. 80, p. 121, 2011

50+20 Research Paper

17 Pages Posted: 10 Jul 2013

See all articles by Hassan Farajzadeh Dehkordi

Hassan Farajzadeh Dehkordi

School of Economic Sciences; Tarbiat Modares University

Naser Makarem

University of Aberdeen

Date Written: 2011


This study aims to investigate whether or not audit quality is influenced by auditor type (governmental vs. private auditors) and by auditor size (Big auditors vs. non-Big auditors). A sample of 2241 firm-year observations from Tehran Stock Exchange (TSE) companies during the period 2002 to 2007 is used. Discretionary accruals (DAC) is employed as representative of audit quality. The cross-sectional version of Jones' model modified by Kothari, et al. (2005) is applied to measure DAC. Results show that financial statements audited by governmental auditors contain smaller discretionary accruals than those audited by private audit firms do. Furthermore, a change from governmental auditor to private auditors is associated with larger discretionary accruals, suggesting that governmental auditors provide superior audits. Finally, the size of non-governmental audit firms does not affect their audit quality, and changes within private audit firms do not lead to changes in the level of discretionary accruals. The empirical results imply that in some settings such as Iran’s, factors including auditor type, intense competition, audit committee, and litigation risk are of greater importance than auditor size. This paper shed new light on the comparison of audit quality between governmental and private audit firms.

Keywords: Auditor Change, Audit Quality, Auditor Size, Auditor Type, Discretionary Accruals, Earnings Management

JEL Classification: M41, M49, M40

Suggested Citation

Dehkordi, Hassan Farajzadeh and Makarem, Naser, The Effect of Size and Type of Auditor on Audit Quality (2011). International Research Journal of Finance and Economics, No. 80, p. 121, 2011; 50+20 Research Paper. Available at SSRN:

Hassan Farajzadeh Dehkordi (Contact Author)

School of Economic Sciences ( email )


Tarbiat Modares University ( email )

Jalal Ale Ahmad Highway
Tehran, Tehran 14115-111

Naser Makarem

University of Aberdeen ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Aberdeenshire
United Kingdom

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