Measuring Audit Quality

• In Event: Audit Quality

Abstract

Extant research typically uses a variation of Big N auditor, discretionary accruals, audit fees, accrual quality, going-concern opinions, or meet or beat the quarterly earnings target as a proxy for audit quality. We provide evidence on the construct validity of these measures by evaluating whether they are able to successfully predict alleged audit deficiencies in engagements that are the subject of lawsuits and SEC’s AAERs filed against auditors over the violation years 1978-2011. The presence of a Big N auditor during the violation period is negatively associated with the total number of audit quality allegations, specifically because Big N auditors are less likely to be accused of exercising inadequate care in the audit. As expected, the proportion of non-audit fees to total fees is associated with accusations of independence violations. The other proxies are not consistently associated with audit deficiencies. Our results raise questions about the descriptive accuracy of some of the commonly used measures of audit quality in the literature.

Authors

• Shivaram Rajgopal, Emory University

• Suraj Srinivasan, Harvard University Business School

• Xin Zheng, Emory University