Measuring Audit Quality

Review of Accounting Studies, Forthcoming

Columbia Business School Research Paper Forthcoming

71 Pages Posted: 1 Jan 2020 Last revised: 8 Dec 2020

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Suraj Srinivasan

Harvard Business School

Xin Zheng

University of British Columbia

Date Written: December 7, 2020

Abstract

In this paper, we document 45 specific allegations related to audit deficiencies based on GAAS, as detailed in 141 AAERs and 153 securities class action lawsuits over the violation years 1978–2016. Next, we use these allegations to validate existing popular proxies of audit quality. Of all the audit quality proxies, we find that restatements consistently predict all of the top six most cited audit deficiencies. The ratio of audit fees to total fees and the presence of a city specialist auditor predict five of the most cited deficiencies. Overall, our results suggest that the predictive power of audit quality proxies depends on (i) the settings that researchers are interested in; and (ii) the specific audit deficiencies hypothesized to matter in the investigated setting. For instance, future studies related to auditor independence might consider using restatements and the ratio of audit fees to total fees as proxies of audit quality.

Keywords: Audit Quality, Audit Deficiency, AAER, Securities Class Action Lawsuits, Enforcement

JEL Classification: M42, K22, K42, M41

Suggested Citation

Rajgopal, Shivaram and Srinivasan, Suraj and Zheng, Xin, Measuring Audit Quality (December 7, 2020). Review of Accounting Studies, Forthcoming, Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3504037 or http://dx.doi.org/10.2139/ssrn.3504037

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Suraj Srinivasan

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=10700

Xin Zheng (Contact Author)

University of British Columbia ( email )

2053 Main Mall
Vancouver, B.C. V6T 1Z2
Canada

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