Evaluation of Audit Quality Based on Financial Statement Information

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Chung, Hay Y.; Lee, B. Brian
Issue Date
College of Business Administration (경영대학)
Seoul Journal of Business Vol4(1): 117~142(1998)
non-Big Six AuditorsBig Sixearning forcast
The primary objective of this paper is to provide empirical evidence on
how financial statements audited by Big-Six auditors convey better
information than those audited by non-Big Six auditors to two groups
of users: security analysts and investors. Earnings forecast errors, the
dispersion of earnings forecasts, and the magnitude of earnings
response coefficients are used as surrogates for the quality of financial
statement information.
Security analysts significantly improve their accuracy and reach a
higher degree of consensus in their earnings forecasts after firms switch
their auditors from non-Big Six to Big Six accounting firms, compared
to switches within the same class (i.e., from a Big Six [non-Big Six] to a
different Big Six [non-Big Six]). Around the auditor switching years, the
magnitude of earnings response coefficients also increases significantly
for firms which switch their auditors from a non-Big Six to a Big Six
firm, compared to those which switch their auditors within the same
class. Overall, Big Six auditors seem to provide higher audit quality of
financial statements, which is consistent with premises adopted by
previous studies.
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 04, Number 1 (1998)
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