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Evidence on the Impact of Audit-Firm Portfolio Characteristics on Client Financial Reporting Quality

Department of Applied Economics KU Leuven Working Paper

31 Pages Posted: 20 Oct 2003  

Ann Gaeremynck

KU Leuven

Sofie Van der Meulen

Catholic University of Lille - IÉSEG School of Management, Lille Campus

Marleen Willekens

Katholieke Universiteit Leuven (KUL)

Date Written: August 2003

Abstract

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.

Keywords: audit-firm portfolio characteristics, financial reporting quality, factor analysis

JEL Classification: M41, M49

Suggested Citation

Gaeremynck, Ann and Van der Meulen, Sofie and Willekens, Marleen, Evidence on the Impact of Audit-Firm Portfolio Characteristics on Client Financial Reporting Quality (August 2003). Department of Applied Economics KU Leuven Working Paper. Available at SSRN: https://ssrn.com/abstract=439360 or http://dx.doi.org/10.2139/ssrn.439360

Ann Gaeremynck

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant B-3000
Belgium
3216326921 (Phone)

Sofie Van der Meulen

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

3 rue de la Digue
Lille, 59000
France

Marleen Willekens (Contact Author)

Katholieke Universiteit Leuven (KUL) ( email )

Naamsestraat 69
B-3000 Leuven
Belgium

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