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A Note on the Association between Audit Firm Size and Audit Quality

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  • RONALD A. DAVIDSON
  • DEAN NEU

Abstract

. This study proposes that comparison of management earnings forecasts with audited, reported earnings provides an approach to the measurement of audit quality. Assuming that managers have incentives to minimize the difference between forecasted and reported income, higher†quality audit firms will tend to be associated with larger forecast errors. Therefore if, as previous literature suggests, larger auditing firms provide higher†quality audits than do smaller auditing firms, larger auditing firms will tend to be associated with larger forecast errors, all else being equal. Data from the Toronto Stock Exchange are used to examine this proposition. After controlling for client characteristics such as risk, the results indicate that larger auditing firms tend to be associated with larger forecast errors consistent with the proposition that, other things being equal, larger auditing firms provide higher†quality audits than do small auditing firms. Résumé. Les auteurs proposent une technique de mesure de la qualité de la vérification qui consiste à comparer les prévisions de la direction relatives aux bénéfices et les bénéfices déclarés qui ont été vérifiés. Si l'on suppose que les gestionnaires ont intérêt à minimiser l'écart entre les bénéfices prévus et les bénéfices déclarés, les vérificateurs de haut calibre auront tendance à être associés à des erreurs prévisionnelles plus importantes. Par conséquent, si, comme l'ont suggéré les études antérieures, les cabinets d'experts†comptables importants offrent des services de vérification de meilleure qualité que les cabinets d'experts†comptables de taille plus modeste, les cabinets d'experts†comptables importants auront tendance à être associés aux erreurs prévisionnelles plus grandes, toutes choses étant égales. Les auteurs utilisent les données de la Bourse de Toronto pour vérifier cette affirmation. Une fois contrôlées les caractéristiques du client telles que le risque, les résultats indiquent que les cabinets d'experts†comptables de grande taille tendent à être associés aux erreurs prévisionnelles plus importantes, ce qui confirme l'hypothèse voulant que, toutes choses étant égales, les cabinets d'experts†comptables de grande taille offrent des services de vérification de meilleure qualité que les cabinets d'experts†comptables de taille plus petite.

Suggested Citation

  • Ronald A. Davidson & Dean Neu, 1993. "A Note on the Association between Audit Firm Size and Audit Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 9(2), pages 479-488, March.
  • Handle: RePEc:wly:coacre:v:9:y:1993:i:2:p:479-488
    DOI: 10.1111/j.1911-3846.1993.tb00893.x
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    References listed on IDEAS

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