Is auditor-AC communication a good indicator of audit quality?

Purpose - This study aims to investigate whether the communication between the external auditor and the audit committee (AC) impacts audit quality. Design/methodology/approach - The authors use textual analysis to develop a new auditor–AC communication metric based on public AC performance reports for the period 2013–2021 in China. The authors also use both high-dimensional fixed effects linear regression and logistic regression to examine the effect of auditor–AC communication on audit quality. Findings - By correlating this new auditor–AC communication metric with established proxies for audit quality, as outlined by DeFond and Zhang (2014), the authors find that firms with more auditor–AC communication have higher financial reporting quality, a lower probability of material misstatements and more informative audit reports. Overall, auditor–AC communication contributes to the improvement of audit quality. Research limitations/implications - The findings offer both practical and policy-oriented implications, particularly for policymakers in search of quantifiable audit quality indicators derived from the interactions between the auditor and the AC. Originality/value - The study advances the field of audit quality by introducing a novel metric for auditor–AC communication. It provides empirical evidence to support the notion that the communication between the external auditor and the AC can improve audit quality.