When Inconvenient Observation Meets Comfortable Myth - A Fresh Look at Audit Quality

MGSM Working Paper No. 2007-9

22 Pages Posted: 27 Feb 2007

See all articles by Tyrone M. Carlin

Tyrone M. Carlin

Southern Cross University; The University of Sydney Business School

Nigel Finch

Saki Partners

Guy Ford

Macquarie University - Graduate School of Management

Date Written: February 2007

Abstract

By convention, the quality of an audit is understood to relate to the joint probability that its conduct results in the detection and reporting of material financial statement errors. Early research into this phenomenon suggested a positive relationship between audit firm size and audit quality. This has resulted in a plethora of studies in which a fundamental element of the research design has been to segment data samples into portions relating to "large" and "small" audit firms and to test for evidence of audit quality differences apparently associated with the size of the firm conducting the audit. Many such studies have concluded that larger audit firms do indeed provide higher quality audit services. Typically however, the quality of audit services provided by "large" firms (of which there are very few) has been assumed to be or treated as homogenous. While the collapse of Arthur Andersen lead to some work which questioned this approach, on the whole, the large firm homogenous quality assumption stands. This paper examines the quality of disclosures pertaining to the high risk issue of goodwill impairment testing made by a sample of large Australian listed corporations in the first year after their transition to A-IFRS. All firms in the sample were clients of "Big 4" auditors. However, disclosure quality and compliance levels varied substantially, with audit firm identity appearing to explain a substantial proportion of observed cross sectional variation.

Keywords: Audit Quality, Financial Reporting, Corporate Governance, Goodwill, Impairment

JEL Classification: M41, M49, M45, G31

Suggested Citation

Carlin, Tyrone M. and Finch, Nigel and Ford, Guy, When Inconvenient Observation Meets Comfortable Myth - A Fresh Look at Audit Quality (February 2007). MGSM Working Paper No. 2007-9 . Available at SSRN: https://ssrn.com/abstract=965351 or http://dx.doi.org/10.2139/ssrn.965351

Tyrone M. Carlin (Contact Author)

Southern Cross University ( email )

Lismore, New South Wales 2480
Australia

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+ 61 2 9036 7230 (Phone)
+61 2 9351 7471 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/tyronec

Nigel Finch

Saki Partners ( email )

Australia

Guy Ford

Macquarie University - Graduate School of Management ( email )

99 Talavera Road
Sydney, NSW 2113
Australia
+61-2-9850-7813 (Phone)
+61-2-9850-9019 (Fax)

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